On July 1 2014, the Foreign Account Tax Compliance Act of 2010 (FATCA) was fully implemented. This act requires foreign financial institutions to report to the IRS the name, address, taxpayer identification number, account number, year-end account balance, and any dividends, interest or income paid or accredited to the account. This reporting requirement applies to most U.S. citizens, residents and U.S.-based entities. Over 80 countries are in compliance with FATCA, so chances are if you have a foreign bank account, the institution in which it is held will be reporting this information to the government.
With foreign institutions reporting U.S. accounts to the IRS, it is more important than ever to file a Report of Foreign Bank and Financial Accounts (FBAR) if you are required to do so.
Who is required to file an FBAR?
You are required to file an FBAR if the following two conditions are met:
- You hold a financial interest in, or you are a signatory over at a minimum one foreign financial account (e.g. an account located outside the U.S.) and
- At any time during the tax year, the total combined balance of all foreign accounts exceeded $10,000.
U.S. citizens and permanent residents are not the only ones required to file an FBAR for accounts totaling $10,000 and above. This requirement also applies to entities such as partnerships, corporations, limited liability companies and trusts or estates created, organized or formed in the U.S. and/or under U.S. law. Certain exceptions apply; such as accounts jointly owned with non-U.S. citizen/resident spouses, foreign accounts maintained on a U.S. military facility and a few others.
What is the penalty for FBAR noncompliance?
Failure to file an FBAR can incur harsh civil and criminal penalties. The IRS typically assesses fines of $100,000 or 50% of the highest account balance, whichever is greater. This means that even if you have a foreign account with a balance of just $10,000, you may still be fined $100,000 for failing to report it. In some cases, the IRS may also pursue criminal charges with maximum prison sentences of up to five years.
The IRS has implemented an Offshore Voluntary Disclosure Program (OVDP) to encourage taxpayers to come forward and begin complying with FBAR filing requirements and incur reduced penalties. For taxpayers that have properly reported all taxable income but only failed to file the FBARs (and have not been yet contacted by the IRS), they can simply file FBARs for all past tax years with a letter of explanation stating why they are late. The IRS has said that taxpayers in this situation will not be penalized.
For all other taxpayers that have failed to file FBARs, it is highly recommended that they speak with a tax professional to discuss their options. With foreign financial institutions reporting bank account information to the IRS, it is critical that you get into FBAR compliance as soon as possible. Any delay only heightens the risk of heavy fines or even criminal charges down the road. Speak to a local tax specialist for more information about how this reporting requirement affects your tax situation.