Offshore Bank Account Tax Reporting: What You Need to Know

Did you know that having financial interests in foreign financial accounts totaling $10,000 or more at any point during the tax year triggers a filing requirement with the US Department of Treasury?  Did you know that having no ownership over or financial interest in these accounts, but having signature authority over a foreign account owned by your employer can also trigger this filing requirement?

When and how am I required to report an offshore account?

Discussions of the IRS tracking down hidden offshore bank accounts can bring to mind the image of a wealthy tycoon plotting to hide his money so that he can avoid having the government take their share.  It is likely a much less devious lack of awareness and understanding by a more-broad group of taxpayers that results in a large portion of foreign accounts not being properly reported.

Form TD 90-22.1, also referred to as the Report of Foreign Bank and Financial Accounts (FBAR) report, is required to be filed with the US Department of Treasury on June 30 of each year following the year being reported.  The purpose of this report is to disclose a financial interest in or signature authority over a foreign financial account.  The report requires that the taxpayer disclose general information about the account including the holder, account number, and maximum balance during the year.

There are some exceptions relieving the filing requirement where the taxpayer has only signature authority over an employer’s account.  Each taxpayer with a financial interest in or signature authority over this type of account should take the time to understand the exceptions and whether the FBAR filing is required in their situation.

Penalties from $10,000 up to $100,000 or 50% of the account balance can be imposed for failure to file this report.

Did you know that a taxpayer holding an interest in specified foreign financial assets with a value of $50,000 may be required to disclose that interest to the IRS? 

A taxpayer with an interest in foreign financial assets including certain financial accounts maintained by foreign financial institutions, stocks or securities issued by someone other than a US person, financial instruments whose issuer is not a US person, or interests in an entity that is not a US person, may be required to attach form 8938 to their annual return.  Similar to form 90-22.1, form 8938 provides disclosure of taxpayer interests in foreign financial assets and requires that the taxpayer provide general information on the reported accounts.  Having interests where the fair market value on the last day of the tax year, or the maximum value at any point during the tax year, exceeds certain thresholds beginning at $50,000 triggers this filing requirement.

Like the FBAR report, failure to file form 8938 carries penalties beginning at $10,000 up to a maximum of $50,000 for failure to file after receiving IRS notification.  Additionally, an accuracy related penalty can be imposed on the return for underpayment of taxes related to non-disclosure of these accounts.

What can I do if I have not completed the correct reports at this time?

There is currently an amnesty program in place to encourage taxpayers that have not completed the required reports to come forward and become compliant for a lower penalty and typically no risk of criminal charges.

The Offshore Voluntary Disclosure Program was first introduced in 2009.  That program and subsequent amnesty programs have been successful in encouraging non-compliant taxpayers to come forward.  A deadline by which taxpayers must apply for the program has not been announced at this point, so taxpayers currently have the opportunity to take advantage and resolve their compliance issues.

Taxpayers with interests in foreign accounts, or taxpayers with signature authority over the foreign accounts owned by their employer should take the time to understand where one or both of these filings may be required.  It is important to understand the types of accounts that must be reported and the thresholds that trigger the reporting requirement.  It may be surprising that the disclosure is not required only from wealthy individuals with large offshore accounts.  Accounts with lower balances and accounts in which a taxpayer has no personal financial interest may require that a filing is done in order to avoid costly penalties.

If you would like more information on our corporate tax services, including information about required filings related to offshore accounts, please contact Monika Diehl at 614-545-9100, or mdiehl@claruspartners.com.

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