• Calling All U.S. Taxpayers With Foreign Financial Assets: What You Need to Know About Reporting to Avoid Penalties
  • March 23, 2012 | Author: Nancy N. Keller-Go
  • Law Firm: Day Pitney LLP - Boston Office
  • With tax day (April 17 this year) looming in the not-too-distant future, many taxpayers are flummoxed by the foreign financial asset reporting requirements. U.S. citizens, green card holders and U.S. income tax residents based on their number of days present in the United States must report and pay taxes on their entire worldwide income (arising from assets wherever situated in the world). In addition they must file certain forms disclosing their foreign assets -- and while there is no tax payment associated with these disclosure forms, failing to file the required forms can result in severe penalties.

    Here is a brief summary to help you figure out whether you need to file disclosure forms, what forms you need to file and by when you need to file them. This summary discusses requirements for individual taxpayers only; it does not cover requirements for entities.

    There are two forms to watch for:

    • U.S. Treasury Form TD F 90-22.1 "Report of Foreign Bank and Financial Accounts." This form, commonly called the "FBAR," has been in existence since the 1970s. Federal income tax Form 1040 asks the question, "Did you have a financial interest in or signature authority over a financial account located in a foreign country?" If the answer is yes, you are directed to file the FBAR, which is filed separately from your income tax returns and due June 30. There is no extension of time available for filing an FBAR.

    • IRS Form 8938 "Statement of Foreign Financial Assets." New for this year and filed with your federal income tax return; this form is due April 17 this year, but if you extend your federal income tax return, this form will also be extended.

    Who needs to file?

    • No filing. You do not need to file either form if at all times during 2011 (i) you had $10,000 or less in aggregate (combined) foreign financial accounts and less than $50,000 in aggregate foreign financial assets, and (ii) you did not have signature authority over a foreign financial account. But, beware, the definitions of "foreign financial account" and "specified foreign financial assets" are extremely broad -- so if you have foreign assets in excess of $10,000, read on.

    • The FBAR must be filed by U.S. taxpayers who owned or had signature authority over foreign financial accounts with a total value exceeding $10,000 at any time during 2011. "Foreign financial account" is broadly defined and includes not only foreign bank and brokerage accounts but also foreign insurance and annuity policies. A financial account maintained with a branch of a U.S. bank that is physically located outside the United States is a foreign financial account. By the same token, an account maintained with a branch of a foreign bank that is physically located in the United States is not a foreign financial account.

    • Form 8938 must be filed by U.S. taxpayers who hold interests in specified foreign financial assets in excess of $50,000 (or, if married filing jointly, $100,000) on the last day of the calendar year, or in excess of $75,000 ($150,000 for joint filers) at any time during the year. (Higher thresholds apply for U.S. taxpayers residing abroad.) If you disposed of specified foreign financial assets during 2011 so that the total value of your interests in such assets was less than $50,000 (or $100,000 for joint filers) as of December 31, 2011, you may still need to file Form 8938 based on asset values during the year. The definition of "specified foreign financial assets" is broader than that of the assets reportable on the FBAR. It includes not only assets reportable on the FBAR but also shares of stock in foreign corporations and securities of non-U.S. issuers (including those listed on a foreign exchange), financial instruments and contracts having an issuer or a counterparty that is not a U.S. person, and any interest in a foreign entity (including foreign trusts and estates). If any of these foreign assets are held in a U.S. account, they need not be reported. If you do not have to file a U.S. federal income tax return for the tax year, you get a free pass on Form 8938 -- regardless of the value of your specified foreign financial assets, you do not have to file Form 8938.

    • Real estate and tangible personal property outside the United States owned directly by a U.S. person are not required to be reported on these forms; however, reporting on Form 8938 is required if the real estate is owned through a foreign entity.

    Penalties.

    • Failure to file an FBAR. Civil penalties for willful failure to file an FBAR can be as high as the greater of $100,000 or 50 percent of the balance in the foreign account(s). These penalties may be assessed for every year in which there is a willful failure to file and so can easily exceed the value of the accounts themselves. Criminal penalties may also apply for willful violations. There are reduced penalties for nonwillful violations, and penalties may be waived if there was a reasonable cause for the failure to report. Generally, if a taxpayer has reported all income from foreign accounts on his or her U.S. income tax returns, this is a strong mitigating factor.

    • Failure to file Form 8938. Failure to file Form 8938 carries a base penalty of $10,000 (and additional penalties of up to $50,000 for continued failure to file after IRS notification). Underpayment of tax attributable to undisclosed foreign financial assets is also subject to an additional substantial understatement penalty of 40 percent.

    If you are unsure of whether these reporting requirements may apply to you or you have questions about complying with them, please let us know.

    We are required under IRS Circular 230 to include the following: Any tax advice provided herein is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed on any taxpayer.

    This communication is provided for educational and informational purposes only and is not intended and should not be construed as legal advice.