Income from foreign accounts is taxable and the account balances must be reported by filing a Report of Foreign Bank and Financial Accounts (FBAR), while foreign financial assets require disclosure via the filing of a Statement of Specified Foreign Financial Assets.
Report of Foreign Bank and Financial Accounts
The initiative driving the FBAR filing requirement is to prevent U.S. taxpayers from circumventing the tax system by concealing money in offshore accounts, in other words, tax evasion. It was introduced in 1970 as part of the Bank Secrecy Act, which established compliance requirements focused on identifying and dismantling money laundering, foreign terrorist financing, and suspicious activity, to name a few. While FBAR activity is reported to the Financial Crimes Enforcement Network (FinCEN), the IRS assumed its enforcement in 2003, which is why FinCEN Form 114 must be filed electronically every year with the IRS.
The IRS defines an FBAR filer as a U.S. citizen, resident, corporation, partnership, limited liability company, estate and trust with:
- a financial interest in, or signatory authority over, at least one foreign financial account located outside the United States; and
- whose aggregate value of such an account (or accounts) was in excess of $10,000 at any time during the reportable calendar year.
FBARs are due on or before April 15 following the calendar year being reported. The IRS grants an automatic 6-month extension of time to file to October 15.
Effective July 1, 2013, the IRS mandated that FBARs be filed electronically. A tax professional can prepare and electronically file an FBAR. Alternatively, an FBAR can be filed by a taxpayer or spouse through the FinCEN e-filing system. Married couples who individually have an interest in or signatory authority over separate foreign financial accounts are required to file their own FBAR. Joint interest in one or more foreign financial accounts can be filed by either the taxpayer or spouse.
While the IRS is more expedient at identifying non-filers of U.S. income tax returns, they will identify, at some point, non-filers of FBARs, and the repercussions can be steep, especially if a willful failure to file is determined.
Statement of Specified Foreign Financial Assets
The IRS considers specified foreign financial assets as assets held for investment that were issued by a non U.S. citizen, resident, corporation, partnership, limited liability company, estate and trust. Examples of specified foreign financial assets per the IRS include, but are not limited to:
- stocks, securities, notes, bonds and debentures
- real estate held through a foreign entity
- swaps, caps and floors involving currency, basis, interest rate, equity (including equity index), commodity, credit default or similar agreement
- interest in a foreign partnership, estate, retirement or deferred compensation plan, and insurance contract or annuity with a cash-surrender value
Specified foreign financial assets get reported on IRS Form 8938, but is not a separate filing. Form 8938 must be attached to the annual return (i.e. Form 1040, Form 1041, Form 1065, Form 1120, etc.) of a specified individual or specified domestic entity by the due date for that return. It is important to note that the filing of Form 8938 does not relieve the responsibility of filing an FBAR and vice versa. There is a $10,000 per year penalty, with an additional penalty of up to $50,000, for failure to disclose specified foreign financial assets via the filing of Form 8938.
If you have a financial interest in, or authority over, any foreign financial accounts, be certain to consult a tax professional to determine if you meet the reporting threshold and have a filing requirement related to the reporting of foreign bank and financial accounts and foreign financial assets.
William Vandegrift, EA
Tax Manager, Spiegel Accountancy
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.