When is a US taxpayer required to disclose offshore accounts on an FBAR and IRS Form 8938? While many US taxpayers and expatriates have come to understand the requirements of the FinCEN Form 114 or FBAR, a surprising number still need to understand the risk they are taking when they fail to disclose offshore financial accounts, assets, and income.
The US Financial Crimes Enforcement Network, often called FinCEN, is a bureau of the US Treasury Department. Its primary mission is to combat domestic and international financial crimes, money laundering, and terrorism.
What are the FBAR and form 8938 requirements and your risks as a taxpayer in the United States? If a US taxpayer has more than a $10,000 aggregate balance in their offshore bank, investment, brokerage, mutual funds, or foreign financial accounts at any point in a tax year (even for a single hour or day), they are required to disclose offshore accounts and file the FinCEN Form 114 or FBA, providing information about all accounts in which they have a financial interest or hold a signatory authority.
The FBAR containing information for the previous calendar year must be filed electronically with FinCEN by April 15. For those who miss the April 15 deadline for any reason, the deadline is automatically extended to October 15.
The penalties for Failure-to-File an FBAR are substantial. Non-willful Failure-to-File penalties begin at around $12,500 for each year the US taxpayer should have submitted an FBAR. If the Failure-to-File is deemed to be “willful” the penalties can go as high as $100,000 or 50% of the highest balance of unreported accounts at any point in the tax year, regardless of present balance, as well as potential exposure to criminal charges.
In addition to the FBAR, a US taxpayer may be required to disclose offshore accounts and financial assets to the IRS through Form 8938, the Statement of Specified Foreign Financial Assets. Form 8938 is required for any individual resident US taxpayer (filing as “Single” or “Married Filing Separately”) who has specified foreign financial assets of more than $50,000 on the last day of the tax year, or if the total value of the assets exceeds $75,000 at any point during the tax year. If “Married Filing Jointly,” the 8938 is required when the value of qualifying foreign financial assets exceeds $100,000 on the last day of the tax year or $150,000 at any point during the tax year.
Non-resident US taxpayers, such as US expatriates or those US citizens who live outside of the US, are required to complete and submit IRS Form 8938 when the total value of qualifying assets exceeds $200,000 on the last day of the tax year or the total value of the assets exceeds $300,000 at any time during the tax year (filing as “Single” or “Married Filing Separately”). Non-resident married taxpayers filing jointly are required to file the 8938 when total assets exceed $400,000 on the last day of the tax year or have a value of more than $600,000 at any point during the given tax year.
Foreign financial assets include securities, offshore bank or financial accounts, and foreign-issued instruments like stocks and bonds.
It is important to note that the IRS is now receiving direct electronic data from hundreds of thousands of banks and foreign financial institutions in the vast majority of nations around the world. These sources provide detailed historical information about individual US taxpayers, the accounts they hold, balances, and, in many cases, transactional information. The IRS simply has to compare this data to the information provided by a US taxpayer on their tax returns.
The Failure-to-File Penalty is $10,000 each year a taxpayer fails to file a required IRS Form 8938. If the taxpayer ignores IRS notices or exhibits continued “non-compliance” the penalty can be increased to $50,000.
For many years this was a manually intensive task and many US taxpayers slipped through the cracks. Recent substantial computing system upgrades and the implementation of Artificial Intelligence (AI) have allowed the agency to glean all incoming information streams much more efficiently and effectively, cross-reference individual taxpayer-level information, and flag potential audit candidates.
We invite you to learn more about the integrated tax, legal, accounting and business consulting services of Allen Barron and contact us or call today to schedule a free consultation at 866-631-3470.
