Individuals as well as corporations, partnerships, and trusts that have financial interests in or authority over one or more foreign financial accounts need to report these relationships to the U.S. Treasury, provided that the aggregate value of those accounts exceeds $10,000 at any time during the year. Failure to file the required forms can result in severe penalties.
For 2018, the due date for filing this report is April 15, 2019. This filing is not made with the IRS; rather, it involves completing Bank Secrecy Act forms and electronically filing them through the U.S. Treasury’s Financial Crimes Enforcement Network.
The Financial Crimes Enforcement Network grants an automatic extension to October 15, 2019, for filers who fail to meet the Report of Foreign Bank and Financial Accounts (FBAR) due date of April 15, 2019. Accordingly, specific requests for this extension are not required.
Failure to Report Penalties
A civil penalty of up to $10,000 may be imposed for a non-willful failure to report; the penalty for a willful violation is the greater of $100,000 or 50% of the account’s balance at the time of the violation. A willful violation is also subject to criminal prosecution, which can result in a fine of up to $250,000 and jail time of up to five years.
CAUTION: On Schedule B of the Form 1040 tax return, you must state whether you have a financial interest in or signature authority over one or more foreign financial accounts. If you answer yes but don’t file the FBAR, your failure to file may be considered willful, which could subject you to the larger fine and jail time.
What is a Financial Account?
The term “financial account” includes securities; brokerage, savings, checking, deposit, and time deposit accounts; commodity futures and options; mutual funds; and even nonmonetary assets (e.g., gold). Such an account is classified as “foreign” if the financial institution that holds it is located in a foreign country. Shares of a foreign stock or of a mutual fund that invests in foreign stocks are not considered foreign if they are held in an account at a U.S. financial institution or brokerage, so they do not need to be reported under the FBAR rules. In addition, an account maintained at a branch of a foreign bank is not considered a foreign financial account if the branch is physically located in the U.S.
Unforeseen Foreign Accounts
You may have an FBAR requirement and not even realize it. For instance, say that you have relatives in a foreign country who have put your name on their bank accounts in case of an emergency; if the value of that account exceeds $10,000 at any time during the year, you will need to file the FBAR. As another example, if you gamble at an online casino that is located in a foreign country and your account exceeds the $10,000 limit at any time during the year, you will need to file the FBAR.
Additional Filing Requirements
You may also have to file IRS Form 8938, which is similar to the FBAR but which applies to a wider range of foreign assets and has a higher dollar threshold. This form is filed with your income tax return. If you are married and filing jointly, you must file Form 8938 if the value of your foreign financial assets exceeds $100,000 at the end of the year or $150,000 at any time during the year. If you live abroad, these thresholds are $400,000 and $600,000, respectively. For other filing statuses, the thresholds are half of the amounts above. The penalty for failing to file Form 8938 is $10,000 per year; if the failure continues for more than 90 days after the IRS provides notice of your failure to file, the penalty can be as high $50,000.
As you can see, a failure to comply with the foreign-account reporting requirements can lead to very severe repercussions. Please call East Coast Tax Consulting at 561-826-9303 if you have questions or need assistance with meeting your foreign account reporting obligations.