Scrutiny into Americans with foreign financial accounts has been increasing for decades. First, September 11, 2001 brought a new awareness of the ways that international banking and fraud could have an impact on American soil. The wariness was heightened in 2009, when Swiss banks were caught teaching Americans how to use these accounts as tax shelters. As a result, reporting requirements have become more stringent than ever before. If you have financial accounts overseas, you can bet the IRS is watching. Filing the right paperwork at the right times will keep you from attracting the attention of the Feds.
FBAR: A New Era in Reporting Foreign Financial Accounts Holdings
Several scandals in 2009 rocked the banking world and confirmed what many had suspected for years: that many people simply were not paying taxes on money in foreign accounts and investments. As a result, reporting requirements were changed dramatically. First, the Offshore Voluntary Disclosure Program was instituted, to encourage taxpayers to disclose formerly hidden accounts with significantly reduced repercussions. This offered a way for Americans who had not been reporting foreign accounts to come clean without fear.
Second, Congress enacted the Foreign Account Tax Compliance Act the next year, in 2010. This bill added teeth to existing reporting laws, increasing penalties for those who ignore this area of the law. The result of these two laws was that around 45,000 Americans reported their foreign accounts, paid a modest penalty, and now have a written closing agreement with the government confirming full disclosure and payment. For 45,000 taxpayers and counting, that is literally and figuratively a good deal.
Foreign Financial Account Reporting: Who Qualifies?
US citizens are required to claim all income on their US income taxes, including overseas income. However, if the total value of your foreign accounts has been over $10,000 at any point in the tax year, you also must file a document called an FBAR, which stands for “foreign bank account report.” This is a complete report of foreign bank and financial accounts that can be used to calculate your taxes.
In an increasingly global financial world, there is a great deal of confusion over what qualifies as a foreign account. A foreign financial account can include not just a typical bank account, but also brokerage and securities accounts, insurance policies, commodities, and futures. If your account was opened or is maintained through a bank location on United States soil, it does not matter if the bank headquarters are located overseas.
Additional Reporting Requirements
Depending on your particular circumstances, there may be more paperwork beyond standard FBAR reporting. The IRS Form 8938 is used to disclose assets such as stocks, trusts, partnerships, and ownership of foreign financial accounts and assets. Even if an asset is not subject to FBAR reporting, they still may require other kinds of documentation. The IRS form 8938 is the most common form needed to make a report of foreign bank and financial accounts outside of the FBAR.
Results of Foreign Financial Account Laws
The 2009 laws had a lasting effect on the way that foreign financial accounts are handled by the IRS and began the widespread use of the FBAR as well as other reporting of financial accounts from overseas. There was a time when people could and did use these accounts as tax shelters, simply not reporting these sources of income. However, the new law was a huge success, with many people coming out of the woodwork to get back on a legal tax track. As a result, this program was extended beyond 2009 with penalties increased to 25%. In 2012, the program was made permanent, with 27.5% final penalty. New revisions were made in 2014, and penalties reduced across the board. The result is that almost 50,000 people have made themselves right with the law and around $6.5 billion has been collected by the IRS.
With an increasing number of people deciding to invest overseas, the IRS will likely continue to crack down on reporting. While this can be a complicated topic, it is important to always remain on the right side of the law. The penalties for failing to report are simply too high. Talk to your CPA if you have any questions about how to be fully compliant while keeping as much of your foreign accounts and investment as possible.
