Many U.S. taxpayers do not realize that they must report their worldwide income, regardless of whether they are living in the U.S. or abroad. If you are a U.S. Citizen or resident alien, you must report your worldwide income from whatever source, subject to the same income tax filing requirements that apply to U.S. Citizens or resident aliens living in the U.S.
When a U.S. taxpayer owns or has signatory authority over a foreign account, the reporting requirements become more complex. All U.S. taxpayers who have an interest in, or signatory or other authority over a bank, securities or other similar foreign accounts must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), if the aggregate value of the foreign accounts exceeds $10,000 at any time during the calendar year. As of October 1, 2013 the FBAR form must be filed through the Financial Crimes Enforcement Network’s (FinCEN’s) Bank Secrecy Act E-Filing System on or before June 30th of the year following the calendar year being reported. For example, to report foreign accounts held open in 2013, the taxpayer must file the FBAR by June 30, 2014.
In addition to filing an FBAR form, the U.S. taxpayer must follow certain reporting requirements on his or her annual tax return. First, the U.S. taxpayer must include a completed Schedule B, Interest and Ordinary Dividends, with his or her annual tax return. On Schedule B, the taxpayer will complete Part III, Foreign Accounts and Trusts, which asks whether, at any time in the year, the taxpayer had a financial interest in or signatory authority over a foreign financial account. Schedule B also asks whether the taxpayer is required to file an FBAR, and if so, in which foreign country the financial account was located.
The U.S. Taxpayer may also be required to file Form 8938, Statement of Specific Foreign Financial Assets with his or her annual tax return. Whether a taxpayer is required to file this form depends on where the taxpayer lives, the taxpayer’s filing status, and the value in the accounts. For example, unmarried taxpayers living in the United States must file Form 8938 if the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
Failure to comply with the above reporting requirements can result in steep penalties to the unwitting taxpayer. Failure to file an FBAR may result in civil penalties for negligence, pattern of negligence, non-willful, and willful violations. These penalties range from a high penalty for willful violations, equal to the greater of $100,000 or 50% of the balance in the account at the time of violation, to a low penalty of $500 for negligent violations. For failing to file a correct Schedule B and Form 8938, the taxpayer could face a failure-to-file penalty of $10,000, criminal penalties, and if the failure to file results in underpayment of tax, an accuracy-related penalty equal to 40% of the underpayment of tax and a fraud penalty equal to 75% of the underpayment of tax.
U.S. taxpayers who have foreign financial accounts would benefit from the experienced tax attorneys of the Law Office Of Jeffrey B. Kahn, P.C. representing you to avoid the pitfalls associated with failure to comply with the reporting requirements associated with owing foreign financial accounts.
Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.