The U.S. government is cracking down on income tax evasion through use of offshore bank accounts. The IRS has initiated strict reporting requirements, and the consequences for noncompliance are ominous. These rules apply to any “United States person”; that includes citizens or residents of the U.S., as well as domestic entities: partnerships, LLCs, corporations, estates and/or trusts.
Income
You must report all worldwide income – foreign wages, earnings, interest, dividends and other income – on your applicable U.S. income tax return. You may be entitled to credits for foreign taxes paid or exclusions for working abroad, but you still must report the income. You must also disclose if you have an interest in a foreign financial account when answering questions asked on the tax return.
The Foreign Account Tax Compliance Act (“FACTA”), passed in 2010, requires additional reporting. The law applies to individuals with a total value of all foreign financial assets exceeding $50,000 ($100,000 if filing a joint return) on the last day of the tax year or $100,000 ($200,000 joint return) at any time during the year. These taxpayers must file Form 8938, Statement of Specified Foreign Financial Assets, with their personal 1040 tax return.
Assets
Any U.S. person who has a financial interest in, or signature authority over, an aggregate of over $10,000 in foreign financial accounts at any time during the calendar year must file form TD F 90-22.1, Report of Foreign Bank and Financial Accounts. This form is commonly known as “FBAR”. The FBAR is filed separately from the U.S. income tax return, and is due each June 30th for the preceding calendar year. The IRS wants to know the country financial institution name, account number, number of owners and maximum value during the year for each account.
Big Penalties and Punishment
An incomplete return can be subject to a $5,000 penalty, regardless of the actual tax return liability. Failure to file Form 8938 will result in a minimum $10,000 and up to a maximum $50,000 penalty. Failing to report worldwide income can be subject to a 20% accuracy-related penalty and up to 25% late payment penalty. It can also be considered fraud, subject to a 75% penalty of underpayment attributed to the fraud. If the IRS can demonstrate a person willfully attempted to evade taxation, the IRS can pursue a felony conviction which could include a fine of up to $100,000 and a maximum prison sentence of five years.
Failing to file the FBAR can be subject to a civil penalty of up to $10,000 per violation. A person who willfully fails to report foreign financial account identifying information may be subject to a civil penalty of the greater of $100,000 or 50% of the amount in the account at the time of the violation.
Why Now?
The IRS knows they’ve lost millions in tax revenue dollars because of foreign financial accounts. The United States is in an all-out effort to prevent and punish anyone trying to evade tax by using these accounts. The message on first page of the FBAR is crystal clear: “The principal purpose for collecting the information is to assure maintenance of reports … have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings”.
We’ll cover recent tax court cases in future articles. For now, we can state with certainty: offshore tax compliance must be taken seriously. You will need experienced professional guidance; call Gary Kaplan with your concerns.
