One of the most common overseas investments of U.S. individuals and companies is a simple bank account. Whether opened while living overseas, operating a business in a foreign country, renting non-U.S. real estate or for any other reason, an reportable foreign bank account, even if never touched, represents a mountain of risk thanks to FBAR.
Going back all the way to the 1970s, the Treasury Department has required U.S. individuals and entities to report the existence of bank accounts at non-US banks. The current version of this report is the FinCen Form 114, Report of Foreign Bank and Financial Accounts, also known as the FBAR. If you have a foreign bank or investment account or multiple accounts with an aggregate highest balance of over $10,000 at any point during the year, you must report all your foreign financial accounts to the Treasury Department. The penalties for failing to file are onerous. There is a civil penalty of $10,000 for each non-willful violation. Willful violations are subject to a penalty of the greater of $100,000 or 50% of the account balance. Each year which you don’t file is subject to a separate penalty.
Identifying reportable foreign accounts for the FBAR is not necessarily straight forward. If you are an officer or owner of a U.S. business with foreign operations with foreign bank accounts, you may be required to report accounts for which you either have signatory authority (control of how funds are directed, actual signing is not required) or indirectly own.
Not to be left out, the Internal Revenue Service instituted their own reporting requirements in 2012 on Form 8938, Statement of Specified Foreign Financial Assets. The thresholds for this form is much higher than the FBAR – taxpayers filing single status must have $50,000 at year end or $75,000 at any time during the year – but there are many assets reportable that are not reported on the FBAR. These other specified foreign financial assets include investments in foreign partnerships and corporations, not held in an investment account. Again, the penalties on this form is $10,000 for failing to file.
For the past decade the IRS has had programs to allow taxpayers to disclose without exposing themselves to criminal penalties. The IRS has announced that the Offshore Voluntary Disclosure Program (OVDP) would end at the end of September 2018. This represents a new risk for taxpayers that have not yet disclosed their accounts to the IRS. The benefit of the OVDP was that there was reduced fines and no threat of criminal prosecution. Now this protection is gone and the IRS is using and developing more advanced systems, international cooperation, and digital tools for locating undisclosed accounts. Now may be the time to come forward and voluntarily disclose rather than to be discovered.
Written by Larry Andler