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Foreign Bank Accounts and Other Foreign Financial Assets Reporting Regulations Take Effect July 1 2014

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Part 1

While many tax reporting requirements have been in place for many years, the Foreign Account Tax Compliance Act (FATCA) set to take effect on July 1, 2014 establishes enhanced due-diligence and information reporting requirements, both for individuals and foreign banks.  This will provide the IRS with an increased ability to identify U.S. taxpayers who hold foreign accounts and investments.

In exchange, the United States will provide information about U.S. account holders who are nationals of foreign countries to their respective authorities.  Failure to comply with the new reporting regulations will result in severe civil tax penalties and potential criminal tax charges.   See our Offshore Bank Account page for more information.

As of June 6, 2014, the IRS has reported that more than 78 countries have consented to FATCA exchanges and more than 77,000 foreign financial intuitions (FFI) have signed on to FATCA.  This casts a wide net to catch U.S. taxpayers who fail to follow foreign bank account and foreign asset reporting requirements and virtually ensures that foreign accounts and assets will be reported to the IRS (much like 1099s and W2s are reported).  U.S. taxpayers will not be able to hide assets from taxing authorities; nor will (inadvertent) non-disclosure of assets go unnoticed.

What draws special attention to these reporting requirements are the harsh penalties and potential criminal sanctions that arise from the failure to comply, as well as, who may be targeted.  The penalty sanctions will further be specifically addressed in part two of this post, however, penalties range from $10,000 to $250,000 and the additional imposition of criminal charges apply to many cases.  As such, individuals have been reluctant to face the consequences of prior non-compliance.  However, by not complying with the current law and/or not remedying a prior failure to report, individuals subject themselves to grossly disproportionate and draconian penalties that could be avoided.

The below examples of required reporting include, but are not limited to:

 

Foreign Bank Account Reporting Form

The Currency and Foreign Transactions Reporting Act, also known as the Bank Secrecy Act (BSA), requires U.S. financial institutions to file reports of cash transactions over $10,000, or a lesser amount, if ANY bank employee believes the transaction to be 'suspicious’.  A report of suspicious activities might trigger an investigation for money laundering, structuring, tax evasion, or other criminal activities.  Note that the $10,000 threshold is merely a guideline and financial intuitions are required to report any suspicious activity.  As such, our tax law firm has provided criminal tax defense for reports of suspicious activity which triggered criminal tax investigations for transactions that involved less than $3,000.

In addition, the BSA requires U.S. persons holding any financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country to report those accounts to the U.S. government if the aggregate value of the accounts exceeds the U.S. dollar equivalent of $10,000 at any time during a tax year.  This report is separate from a tax return and is filed on FinCen Form 114 - Report of Foreign Bank and Financial Accounts (Note this is formally known as FBAR Treasury Department Form 90.22-1).  Form 114 must be received by the government on or before June 30th of the year; no extensions are granted.

Any U.S. person (which includes green card holders and some others, as well as, United States citizens) with a direct or indirect financial interest or having signature authority of a non-U.S. bank or financial account may be subject to FBAR filing.

 

Form 8938 - Statement of Specified Foreign Financial Assets

In addition to FBAR reports, FATCA requires U.S. taxpayers to report their interest in specified foreign financial assets (SFFAs) with their individual income tax returns using Form 8938, Statement of Specified Foreign Financial Assets (SFFA).  Filing thresholds vary; however, they generally start with foreign assets over the U.S. dollar equivalent of $50,000.  Similar to the FBAR filing requirement, U.S. citizens, green card holders, nonresident aliens who have elected to be treated as resident aliens and those who are resident aliens for any part of the tax year are subject to this requirement.

An SFFA is any foreign account maintained by an Foreign Financial Institution (FFI) including, but not limited to, depository accounts, stocks or securities issued by a non-U.S. person, any financial instrument or contract held for investment that has an issuer or counterparty other than a U.S. person, retirement or deferred compensation accounts, any interest in a foreign-issued insurance contract or annuity with a cash-surrender value, and an interest in a foreign entity, such as a corporation, partnership, or foreign trust.

 

Form 3520 - Annual Return to Report Transactions with Foreign Trusts and Receipts of Foreign Gifts

In Addition to FBAR reports and Form 8938, FATCA requires U.S. taxpayers to report ownership interests (direct or indirect) in foreign trusts and direct or indirect distributions from a foreign trust.  A distribution is any transfer of money or other property from a trust, whether or not the trust is treated as owned by another person and without regard to whether or not the recipient is a designated beneficiary.  Furthermore, distributions include constructive transfers.  For example, charges made by a U.S. taxpayer on a credit card that is paid by a foreign trust, are treated as a distribution to the U.S. taxpayer.

Annual foreign gifts in excess of $100,000 must also be reported and gifts from certain people are added together (i.e., gifts from parents).  Failure to report can subject the recipient to a penalty of twenty-five percent (25%) of the gift.

 

Form 3520-A - Annual Information Return of Foreign Trust with a U.S. Owner

In addition to Form 3520 which is filed by the U.S. taxpayer, Form 3520-A requires the foreign trust to file an annual informational return when the foreign trust has at least one U.S. owner.  The tax report requires the foreign trust to report its U.S. beneficiaries and owners.  A U.S. beneficiary generally includes any person that could possibly benefit (directly or indirectly) from the trust at anytime, whether or not the person is named in the trust instrument.  Moreover, U.S. beneficiaries may include a foreign corporation, partnership, or other trust or estate.

 

Form 5471 - Information Return of U.S. Persons with Respect to Certain Foreign Corporations

FATCA also requires certain U.S. citizens and residents who are officers, directors, or shareholders in foreign corporations to file a Form 5471 report, an information return with respect to certain foreign corporations.  Here the filing requirements are separated into five (5) categories of filers and are too voluminous to list for the purposes of this post.  However, if a U.S. taxpayer is directly or indirectly involved with a foreign corporation, they should seek the advice of a tax attorney to ensure compliance with U.S. reporting under the law.

In Part 2 we will take a look at the civil tax penalties involved with FATCA.   In the meantime, our tax article California Tax Journal,  A Closer Look at the Non-Willful FBAR Penalty, will shed some light on aspects non-willful penalties.

Moskowitz LLP, is a tax law firm that successfully represents U.S. Citizens and green-card holders who have financial interests outside the United States comply with  tax laws while minimizing criminal exposure, monetary fines, and penalties.

Steve Moskowitz and his tax law firm have been practicing tax law for over thirty years.   We save financial lives by relentlessly pursuing all avenues to successfully resolve client tax matters.  From controversy work and tax returns to tax opinions and criminal tax defense, we help individuals and small businesses understand their entire tax picture and act accordingly.  We defend your personal liberty and dignity through skill and experience.  We do whatever it takes, within the bounds of the law, to deliver top quality, non-judgmental representation.

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