IRS and Foreign Accounts.

A US citizen or resident alien must report all income, that earned in the US and that earned in other countries, when filing his tax return.  Additionally, the taxpayer must answer a series of questions on the Schedule B about foreign accounts he holds or for which he has signature authority.  Failure to report foreign income or to disclose foreign accounts subjects the taxpayer to civil penalties and possible criminal prosecution.

Most taxpayers have no interest in foreign financial accounts which include bank accounts, brokerage accounts, mutual funds or trusts.  However, any taxpayer that has such an account has to be aware of IRS reporting requirements enacted under the Bank Secrecy Act.  The FBAR, Report of Foreign Bank and Financial Accounts, is used by the US government to identify people who may use foreign accounts to avoid US tax laws.  Investigators also use the FBAR to assist in tracking funds used for illegal purposes or to identify unreported foreign income.

Who must file an FBAR?  Any US citizen, US resident, US business, or US trust or estate with an interest in or signature authority over at least one financial account located outside the United States when the total value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.   The FBAR must be filed even if the accounts generated no income for the tax year.

The FBAR is not filed with the tax return.  The tax return includes Schedule B with the questions about foreign accounts appropriately answered and Form 8938, Statement of Specified Foreign Financial Assets, if the value of the financial accounts was over $50,000 at yearend or over $75,000 at any time during the year.  The FBAR is completed and filed separately.  The FBAR is due by June 30.  No extensions are granted.

The consequences of not disclosing foreign financial accounts are significant.  If non-disclosure was inadvertent, non-willful in IRS terms, the penalty is up to $10,000.  If the non-reporting is considered willful, the penalty is the greater of $100,000 or 50 percent of the total of the account balances.  The level of the penalties is indicative of the seriousness of this issue to the IRS. 

If you are a taxpayer with an interest in foreign accounts it is probably best to have your tax professional review your holdings, identify your reporting requirements, and complete and file the forms.  Make sure this is done correctly and avoid future problems. 

IRS Circular 230 Disclosure

Pursuant to U.S. Treasury Department Regulations, we are now required to advise you that any federal tax advice contained in this communication, including attachments and enclosures, is not intended by the Sender or Sandra G Johnson, CPA, P.C. to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.