After consulting with his ORBA tax advisor, Jason decided that it was in his best interest to open an offshore account and allocate a portion of his wealth outside of the United States. Jason’s advisor informed him that navigating the world of foreign account disclosures can become very complex and it is absolutely crucial to follow the IRS’s strict foreign account reporting requirements, especially with the implementation of the Foreign Account Tax Compliance Act (FATCA).
In a nutshell, if you have a financial interest in or signature authority over any foreign accounts, including bank accounts, brokerage accounts, mutual funds or trusts, you must disclose those accounts to the IRS, or be subject to substantial IRS penalties.
A taxpayer who determines that they have a financial interest in and/or signature authority over a foreign account must inform the IRS each year by checking the box on line 7a of Schedule B (“Interest and Ordinary Dividends”) of Form 1040 – regardless of the account value. If the total value of your foreign financial assets exceeds $50,000 ($100,000 for joint filers) at the end of the tax year or exceeds $75,000 ($150,000 for joint filers) at any time during the tax year, you must provide account details on Form 8938 (“Statement of Specified Foreign Financial Assets”) and attach it to your tax return.
Finally, if the aggregate value of your foreign accounts is $10,000 or more during the calendar year, you must file FinCEN (Financial Crimes Enforcement Network) Form 114 – “Report of Foreign Bank and Financial Accounts (FBAR).” File the form electronically with FinCEN no later than June 30 of the following year. No extensions are permitted.
Taxpayers who willfully choose not to report their foreign accounts are subject to penalties as high as the greater of $100,000 or 50% of their foreign account value every year that they failed to disclose up to a maximum of six years. If multiple years have not been reported the penalty for each year will be determined by allocating the total penalty amount to all years for which the FBAR violations were willful based upon the ratio of the highest aggregate balance for each year to the total of the highest aggregate balances for all years combined. For example, a taxpayer with a Swiss bank account with a balance of $400,000 for the preceding 2 years who willfully does not disclose to the IRS of the accounts existence and the IRS finds out – can be subject up to $200,000 in penalties – 50% of the highest account value over the 2 year period of which $100,000 will be allocated to each year where there was a violation. This in addition to accuracy penalties, interest and any associated back taxes on income that should have been reported in the US, as well as possible criminal penalties.
Non-willful violations realize a lesser penalty of $10,000 every year that a taxpayer fails to disclose up to a maximum of six years. In special circumstances, penalties may be waived for non-willful violations.
Since the implementation of the Foreign Account Tax Compliance Act (FATCA) in March of 2010, it is more important than ever to ensure compliance with foreign account reporting requirements. FATCA was implemented to detect and prevent US persons from evading US tax by hiding assets outside of the US. It provides for stronger information reporting and compliance by key stakeholders by providing a comprehensive set of rules around the processes of reporting information on a payee – enabling the IRS and other authorities to have better information to capture tax evaders.
Jason is glad that he reached out to his tax advisor before opening up his offshore account. He did not realize all that was necessary to ensure that he was compliant with the various foreign account reporting requirements and the significant amount of penalties he would be subject to if he did not disclose his account. He now has piece of mind that his account is fully disclosed and his wealth is allocated how he so desires.
For questions, contact David Bowman at 312.670.7444. Visit orba.com to learn more about our Wealth Management Group.