What Taxpayers Need to Know About Reporting Foreign Bank and Financial Accounts

 Posted on February 28, 2023 in Taxation Law

Taxpayers with foreign assets must take extra care when filing their annual tax returns and reporting information to the IRS through other means. By law, taxpayers with foreign accounts are required to report these assets and pay any applicable taxes. Failure to report accounts or other assets when required could result in tax penalties. By understanding the specific requirements that apply to them, taxpayers can avoid tax-related issues, and they can determine the steps to take to respond to any penalties that have been assessed.

The Basics of Foreign Account Reporting

When it comes to reporting foreign financial accounts, there are two main forms that taxpayers should be familiar with: the Report of Foreign Bank and Financial Accounts (FBAR) and Form 8938. The FBAR is used to report the value of a taxpayer’s foreign bank and financial accounts in total at the end of a tax year. A taxpayer will be required to file an FBAR if they have an interest in one or more bank accounts, brokerage accounts, mutual funds, or other financial accounts in countries other than the United States, as long as the aggregate value of all of these accounts exceeds $10,000 at any time during the calendar year. FBARs are filed electronically with the Financial Crimes Enforcement Network (FinCEN), and they are due on April 15.

Form 8938 is used for reporting certain specified foreign financial assets when the aggregate value of all such assets exceeds a certain threshold amount. In addition to foreign financial accounts, Form 8938 will include stocks and securities issued by foreign entities and ownership interests in foreign businesses. The following reporting thresholds apply for Form 8938:

• Unmarried individuals living in the United States will be required to file Form 8938 if the total value of their specified foreign financial assets was at least $50,000 at the end of the tax year or at least $75,000 at any time during the tax year.

• Married couples living in the United States who file taxes jointly will be required to file Form 8938 if the total value of their specified foreign financial assets was at least $10,000 at the end of the tax year or at least $150,000 at any time during the tax year.

• Unmarried individuals living outside the United States will be required to file Form 8938 if the total value of their specified foreign financial assets was at least $200,000 at the end of the tax year or at least $300,000 at any time during the tax year.

• Married couples living outside the United States who file taxes jointly will be required to file Form 8938 if the total value of their specified foreign financial assets was at least $400,000 at the end of the tax year or at least $600,000 at any time during the tax year.

• Specified domestic entities, which include corporations or partnerships that earn 50 percent of their gross income from passive income, as well as trusts that have specified individuals or entities as beneficiaries, will be required to file Form 8938 if the total value of the entity's specified foreign financial assets was at least $50,000 at the end of the tax year or at least $75,000 at any time during the tax year.

Form 8938 must be filed along with a taxpayer's annual tax return.

Penalties For Not Reporting Foreign Financial Assets

Taxpayers who fail to properly file an FBAR or Form 8938 may face steep penalties from the IRS and FinCEN. The penalties for failing to file an FBAR are adjusted each year for inflation. For penalties assessed after January 19, 2023, a non-willful violation may result in a fine of $15,611, while a willful violation may result in a fine of $156,107. Criminal penalties may also apply, and a person could potentially be sentenced to up to 5 years in prison.

The penalty for failing to file Form 8938 when required is $10,000. If a taxpayer does not file Form 8398 within 90 days after receiving notice from the IRS that it is required, they may be subject to an additional $10,000 penalty for each 30-day period in which they fail to file the form, up to a maximum of $50,000. Criminal penalties may also apply in certain situations.

Contact Our San Jose Tax Lawyer for Foreign Account Reporting

Tax issues related to foreign assets and accounts can be very complex, and in many cases, taxpayers inadvertently violate their requirements due to a lack of knowledge of the applicable tax laws. At John D. Teter Law Offices, we can advise you on how to address these issues properly, and we can provide you with representation as you deal with the IRS and/or FinCEN, helping you become compliant with tax laws while minimizing the penalties you may face. To set up a consultation and learn more about how we can assist with these issues, contact our San Jose, CA tax law attorney at 408-866-1810.

Sources:

https://www.irs.gov/newsroom/how-to-report-foreign-bank-and-financial-accounts

https://www.irs.gov/instructions/i8938

https://www.irs.gov/businesses/comparison-of-form-8938-and-fbar-requirements