For U.S. taxpayers, income is taxed regardless of location. While it is not illegal to earn income abroad or to hold an offshore account, failure to disclose income to the Internal Revenue Service is illegal. Similarly, U.S. taxpayers holding foreign accounts are subject to increased scrutiny by the Financial Crime Enforcement Network (FinCEN). Following are two special reports individuals holding foreign accounts should be cognizant of.
The Foreign Accounting Tax Compliance Act (FATCA). Enacted to address tax noncompliance by U.S. taxpayers holding offshore accounts, FATCA requires that certain U.S. taxpayers and foreign financial institutions report the value of assets held to the IRS.
Who is Required to Report Under FATCA?
- Specified Individuals/Entities: FATCA requires specified individuals (i.e., U.S. citizens, resident aliens, and certain non-resident aliens) and specified domestic entities (i.e., domestic corporations, partnerships, and trusts) holding financial assets outside the United States to report those assets to the IRS by attaching Form 8938, Statement of Specified Foreign Financial Assets, to the taxpayer’s annual tax return. Generally, taxpayers must file Form 8938 if the aggregate value of their offshore assets exceed $50,000.
- Non-US Foreign Financial Institutions (FFI) and Non-Financial Foreign Entities (NFFE): FFIs and NFFEs that agree to the law must annually report the name, address, and tax identification number (TIN) of each account holder that meets the criteria of a US citizen; the account balance; and any deposits and withdrawals on the account for the year.
Where to File FATCA? Form 8938 should be attached to your annual income tax return and filed pursuant to the instructions on the return.
Penalties of Non-Compliance. Failure to comply with FATCA’s reporting requirements may subject you to the following penalties:
- A $10,000 failure to file penalty;
- An additional penalty of up to $50,000 for continued failure to file after IRS notification; and
- A 40 percent penalty on an understatement of tax attributable to non-disclosed assets.
The Foreign Bank Account Report (FBAR). In addition to reporting offshore assets to the IRS, certain taxpayers holding offshore accounts must report the location and value of those accounts by filing Form 114 with FinCEN.
Who is Required to File a FBAR? U.S. citizens are required to file a FBAR if
- (1) they have a financial interest in or signature authority over one or more financial accounts located outside the U.S.; and
- (2) the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported.
When Should FBAR be Filed? Pursuant to the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, the new annual date for filing FBARs for foreign financial accounts is April 15. FinCEN will grant filers unable to meet the deadline a 6-month extension to October 15th each year.
Where Should FBAR be Filed? Form 114 can be found on FinCEN’s website and may be completed online.
Penalties of Non-Compliance. Failure to comply with FBAR reporting requirements may result in civil penalties. These fall into two categories:
- (1) A non-willfulness penalty of up to $10,000 may be imposed on any person who unintentionally violates the FBAR filing and recordkeeping requirements; and
- (2) A willfulness penalty with a ceiling of the greater of $100,000 or 50 percent of the balance in the account at the time of violation may be imposed on any person who intentionally violates the FBAR filing and record keeping requirements.