A new form has been released by the IRS for 2011. This fact by itself probably does not grab one’s attention, as these additions/modifications are commonplace. However, failure to file this form may carry a 5-year prison sentence and/or upwards of $100,000 in penalties. The significance of these penalties garners our attention.
Apparent from the release of this form and the recent stronger enforcement for non-filing similar forms related to foreign assets—the tax shelter practices involving the stereotypical Swiss and Cayman Island bank accounts or other foreign assets may be coming to a close.
So what exactly is a “foreign financial asset”? The definition includes:
1) depository or custodial accounts at foreign financial institutions (i.e. securities, savings, insurance or annuity polices with a cash value, mutual funds, brokerage, deposit, checking, etc.), and
2) to the extent not held in an account at a financial institution,
a) stock or securities issued by foreign persons
b) any other financial instrument or contract held for investment that is issued by or has a counterparty that is not a U.S. person, and
c) any interest in a foreign entity.
The newest form relating to off-shore accounts is Form 8938: Statement of Specified Foreign Financial Assets. It is a required filing if specified foreign financial assets have an aggregate fair market value exceeding $50,000 on the last day of the tax year or $75,000 at any time during the year (these thresholds are doubled if you are married and file jointly). This filing may also apply to select business entities.
The new form does not supersede TD F 90-22.1: Report of Foreign Bank and Financial Accounts, which in its current form has been in existence since the year 2000. Form TD F 90-22.1 is required to be filed if the aggregate value of all foreign accounts exceeds $10,000. Not only does this apply to ownership but also to signature authority over a foreign financial account. This form applies/is required not only to individuals but to business entities created or organized in the U.S. as well.
Form 8938 should be attached to your annual return (form 1040, 1120, 1065, etc) and should be filed by the date of the annual return including extensions. Form TD F 90-22.1 must be received by the Treasury department on or before June 30th of the year immediately following the calendar year being reported. No extension of time to file form TD F 90-22.1 is allowed.
What determines if an account is “foreign” is the account’s physical location—which admittedly may seem a bit obvious. Perhaps less clear is when an account is related to a multi-national company. An account maintained with a branch of a U.S. bank that is physically located outside of the U.S. is a foreign financial account. Likewise, an account maintained with a branch of a foreign bank that is physically located in the U.S. is not a foreign financial account.
A couple important items to note:
1) Although higher thresholds may apply to a taxpayer or U.S. citizen living abroad, these individuals are not immune.
2) The two forms mentioned are not the only forms related to disclosure and reporting of foreign financial interests for businesses and individuals. Depending on the circumstances, other forms may be applicable and carry similar fines for failure to file.
Brian Mahany, an attorney concentrating in foreign reporting requirements, provides some alarming examples of potential noncompliants:
“Not a single day goes by where we do not receive several calls from individuals with unreported foreign bank accounts. Although approximately 45,000 taxpayers came forward since 2009, that is just a small percentage of the estimated 500,000 U.S. taxpayers with unreported foreign accounts. The few bad apples hiding money in Swiss or other foreign banks in the hopes of evading taxes know who they are. Most taxpayers not in compliance with offshore reporting rules simply don’t know they are breaking the law, however. Unfortunately, neither do many professional preparers.
Dual nationals, foreign born Americans, parents who open an offshore account to support their kids in a foreign university, people inheriting accounts, foreign green card holders, Americans working overseas… these are some common examples of people who often have foreign accounts yet simply don’t know of their reporting obligations.
This year, those obligations include the traditional (and yet still unbeknownst) filing of FBARs (Report of Foreign Bank and Financial Account) and compliance with the new FATCA law (Foreign Account Tax Compliance Act). For taxpayers with interests in foreign corporations, trusts and other assets there are even more rules. Penalties for noncompliance are severe.
The penalty for willfully failing to file an FBAR is up to 5 years prison. Even if there is no criminal prosecution, the civil penalty is the greater of $100,000 or 50% of the highest balance in the account for each year the account is not properly reported. “Innocent” (nonwillful) violations carry a penalty of $10,000 per year.”
These regulations clearly deserve to be taken very seriously by both businesses and individuals alike. If you are one of the estimated 455,000 Americans who fall into the non-compliance category, you should contact your tax professional and potentially a tax attorney, as there may be amnesty available if you correct the problem before you become subject to an IRS audit.