Radio X June 19 Broadcast Foreign Asset Reporting Questions & Answers

Transcription

1 Radio X June 19 Broadcast Foreign Asset Reporting Questions & Answers 1. What is the FBAR filing? FBAR is the acronym for the Foreign Bank Account Report that must be filed annually with the IRS to report information about foreign financial accounts. The FBAR is only one of a series of reports that are required to be filed with the IRS to disclose information about foreign accounts or entities. 2. Who is required to file an FBAR? An FBAR is required to be filed by any U.S. person who has a financial interest in or signature authority over foreign financial accounts having an aggregate value above $10,000 at any time during the calendar year. 3. When is the FBAR due? Can it be extended? The FBAR is due June 30. The due date can not be extended and the FBAR must actually be received electronically by the IRS on or before June What is the definition of a "U.S. person" who is required to file? A U.S. person is defined as a U.S. citizen or resident, or entity created or organized in the United States, including a U.S. corporation, partnership, LLC, trust, or estate. If the majority owner of a U.S. entity is also a U.S. person, he or she will also have an FBAR filing obligation for the foreign financial accounts held in name of the entity. Also, the trustee and grantor of a trust and, in some cases, the beneficiary of an estate or trust which owns a foreign financial account may also be required to file. 5. Is a single member LLC required to file the FBAR? Yes, a single member LLC that is organized in the U.S. and has control over foreign financial assets exceeding the $10,000 threshold is required to file.

2 This is the case even if the single owner of the LLC is foreign. Moreover, if the single owner is a U.S. person then the LLC and the owner would both be required to file. 6. May taxpayers and their spouse file jointly? A husband or wife is permitted to file jointly with his or her spouse only if three conditions are met: (1) all the financial accounts that the non-filing spouse is required to report are jointly owned with the filing spouse; (2) the filing spouse reports the jointly owned accounts on a timely filed FBAR electronically signed; and (3) the filers complete and sign a Record of Authorization to Electronically Filed FBARs. 7. Are minor children required to file? Yes, a child is responsible for filing his or her own FBAR. If a child cannot file his or her own FBAR for any reason, such as age, the child's parent, guardian or other legally responsible person must file it for the child. 8. What is considered a "financial interest" in an account? The term financial interest is broadly defined in the regulations to include the interests of any beneficial owners of a foreign financial account, even though he or she may not be identified as the legal account holder in the records of the financial institution or able to communicate directly with the financial institution. Thus, a U.S. person is required to file an FBAR if the owner of record or holder of legal title of the account is an entity controlled by the U.S. person or is another person acting on the U.S. person s behalf as an agent, nominee, attorney or in some other capacity. 9. What types of foreign financial accounts are to be included in this filing? FBAR is somewhat of a misnomer because the definition of financial account is much broader than bank account. The definition includes investment accounts, mutual funds and similar pooled funds. Notably, the definition also expressly includes certain foreign retirement accounts and insurance or annuity policies with a cash value.

3 10. Should investments in a mutual fund or partnership that has a financial interest be included in the FBAR? Investments in a foreign mutual fund are included but not a partnership unless it is controlled by the taxpayer. 11. What are the penalties for nonfiling or late filing of the FBAR? The penalties for noncompliance with FBAR filing obligations can be quite severe. If the nonfiling or late filing was willful the penalty can be up to the greater of $100,000 or 50 percent of account balances; criminal penalties may also apply; however, if the failure was non-willful the penalty may not exceed $10, If a taxpayer has not filed an FBAR and was required to do so, what are his/her options? Explain Voluntary Disclosure Program and the Streamlined Compliance Procedure. A taxpayer that has not filed an FBAR has three options to come into compliance: 1) IRS Delinquent FBAR Submission Procedures A person who has not previously filed an FBAR, but who has properly filed federal income tax returns that fully reported the income from any foreign accounts may be eligible for the IRS's Delinquent FBAR Submission Procedures. Under the Delinquent FBAR Submission Procedures, [t]he IRS will not impose a penalty for the failure to file the delinquent FBARs if you properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted. 2) IRS Streamlined Filing Compliance Procedures

4 The IRS's Streamlined Filing Compliance Procedures are available for a resident or nonresident U.S. person who mistakenly failed to file an FBAR and/or failed to report on a U.S. tax return income related to foreign financial accounts. The streamlined program requires a participant to file federal income tax returns (or amended returns) for three prior years and FBARs for six prior years, along with a declaration (signed under penalties of perjury) attesting that his or her failure to file was not willful. In general, under the terms of the streamlined program, the IRS will not impose any penalties on a participating nonresident taxpayer. For a taxpayer resident in the U.S., the IRS will impose (1) accuracy penalties (20 percent) on the unreported tax, and (2) a penalty equal to 5 percent of the maximum aggregate balance in the unreported foreign financial accounts during the six-year period. 3) IRS Offshore Voluntary Disclosure Program The Offshore Voluntary Disclosure Program ( OVDP ) is intended to allow those taxpayers who knowingly violated the tax laws to come back into compliance and avoid criminal prosecution. In general, this program requires a taxpayer to file eight prior years income tax returns and FBARs, provide detailed information regarding any unreported foreign financial account(s), and pay all taxes, accuracy penalties, delinquency penalties (up to 47.5 percent of the tax due), and interest due for the eight-year period. In addition, the IRS imposes an FBAR-type civil penalty equal to 27.5 percent of the single maximum aggregate balance in the unreported foreign financial accounts during the eight-year period. The penalty is increased to 50 percent if the IRS or DOJ has initiated an investigation of the financial institution in which the accounts are held. While these are stiff monetary penalties, OVDP may be the only viable option for a U.S. person otherwise exposed to even greater civil penalties or potential criminal prosecution. Since 2009, more than 50,000 account holders have voluntarily contacted the IRS to resolve issues related to unreported foreign financial accounts. 13. Are FBARs audited by the IRS?

5 Yes, U.S. persons who fail to file or file inaccurate FBAR reports are increasingly at risk of being discovered by the IRS and the Department of Justice due to the implementation last year of the Foreign Account Tax Compliance Act ( FATCA ) which requires foreign financial institutions worldwide to identify any U.S. account holders or U.S. beneficial owners of foreign financial assets and to disclose that account information annually to the IRS. 14. When must the Form 8938 be filed? The Form 8938 must be filed annually with an individual s U.S. income tax return if he or she had interests in foreign assets or accounts that exceeded certain thresholds on the last day of the tax year or at any time during the tax year. The threshold amounts vary from $50,000 to $600,000 depending upon filing status and whether the individual is a U.S. resident or non-resident. 15. Isn't there duplication between the FBAR and Form 8938? Yes, there is some duplication but there are also some differences in 1) the specified individuals who must file, 2) the monetary threshold for filing, and 3) the types of accounts and assets that must be counted. Also, if an individual files only of several other information reporting forms such as 3520 for foreign trusts or form 5471 for foreign corporations the information required to be shown on the form 8938 is abridged. 16. What are the penalties for nonfiling or late filing of Form 8938? Penalties may be imposed up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of a failure to disclose, for a potential maximum penalty of $60,000; criminal penalties may also apply. Also, failure to file form 8938 or certain other information returns regarding foreign accounts or entities keeps the statute of limitations open indefinitely for all items on a U.S, income tax return.