The Internal Revenue Service and Department of the Treasury have in recent years increased their targeting of international bank accounts as a means of tax evasion. One method has been the introduction of Form 8938, Statement of Specified Foreign Financial Assets, which is due with the taxpayer’s personal income tax return. A more common report is Form FinCen114, also known as TD F 90-22.1 or an “FBAR”, which is due on June 30th, and has broader reporting requirements.
FBARs are used to report a financial interest or signature authority in a foreign bank account that had a balance at any point in the prior year of over $10,000 USD. This form is filed with the Financial Crimes Enforcement Network and most people must now do so electronically. Even though the form is filed with FinCen, it is heavily related with the IRS and taxes as FinCen as part of the Department of the Treasury.
Generally speaking, a financial interest in a foreign bank account typically means that you have an account at a branch in your name in another country. If the balance is below 10,000 throughout the year, no additional reporting is required (although the interest on the account is taxable on your Federal personal income tax return). Other examples that taxpayers sometimes forget about which should be reported include online poker and gambling accounts and rental accounts. An FBAR also should be filed for any foreign accounts for which you have a signatory interest, even if you do not have financial interest in this account. Most commonly these are done for corporate officers of multinational businesses.
An FBAR report is an information return; it will not per se increase the amount a taxpayer owes. The information on the return includes the name of the institution, account number, branch location and highest balance in the account during the year. This information is used in enforcement of tax evasion, making sure taxpayers do not deposit money overseas to avoid paying tax.
What makes the FBAR such an important form to get correct and stressful are the penalties. Non-willful noncompliance can result in penalties up to $10,000, and willful non-compliance can result in penalties up to the greater of $100,000 or 50% of the account balance. With such steep and draconian penalties, it is prudent that a taxpayer properly file this form in an accurate and timely manner. Some taxpayers will go to great lengths to shield income from taxation, however, the IRS has made it very clear that they are cracking down severely on this form of tax evasion.
Edward McWilliams, CPA
Ed is a Partner in the firm’s tax and business advisory practice focusing on providing services to middle market private companies across different industries as well as to early stage startups. Ed has over a decade of experience providing tax and business consulting services to these companies of different sizes and across different industries, bringing a broad and diverse knowledge base and strategic solutions to the many complex issues that businesses face.