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Have An Undisclosed Foreign Bank Account? You May Owe The IRS $10,000!

Do you have any money or assets outside the U.S.? Seems like a pretty straightforward question, doesn’t it? Well, a lot of people are surprised to learn that they do have offshore funds. And if they don’t file a certain form with the U.S. Treasury Department by June 30, the minimum late fee is $10,000.

The form in question is known as the FBAR – Report of Foreign Bank and Financial Accounts. Starting in 2014, there is a new, mandatory online version of the form – FinCEN Form 114. It is filed directly through a website maintained by the U.S. Treasury. The 2013 Form was due June 30, 2014.  The purpose of this reporting document is to give the U.S. Treasury Department specific information about all financial accounts that Americans control, worldwide. The idea is to ensure that people are not hiding money offshore and thus not reporting it on their U.S. income tax returns.

Who needs to file this form?

United States persons who have a financial interest in or signature authority over at least one financial account located outside of the United States; and

People for whom the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.

There are two more conditions that go with this form.

At the bottom of your Form 1040 Schedule B (where you report dividends and interest), there are two checkboxes. You must check YES, if you are required to file the FBAR. Checking NO can result in that $10,000 fine.

You must report the earnings on all those overseas accounts – however small the earnings are.

This seems pretty clear, right? So what’s the problem? Where’s the confusion? It all stems from the Federal government’s requirement that you have a “financial interest in or signature authority” over a foreign bank account.

This is what gets innocent people caught in the penalty trap.

In fact, did you know that there’s a second form you may have to file if you have assets or accounts overseas? It is Form 8938 which under the Foreign Tax Compliance Act (FATCA) is included with your Form 1040 for tax years starting 2011. You file this if your overseas accounts and/or assets exceed certain limits – $50,000 on the last day of the tax year or $75,000 at any time during the tax year (higher threshold amounts apply to married individuals filing jointly and individuals living abroad).

Common Situations That Will Trigger The $10,000.00 Penalty

Your elderly parents in India set you up with the authority to sign on their bank account(s) in case of illness. You meet both definitions (above) – even if you never use the account and don’t think of it as yours and forgot you ever got this power from your parent(s). Result: IRS will assert a $10,000 penalty.

There’s an inheritance from your aunt in the U.K. The estate attorney controls it all until the details are worked out. But the assets and funds are in trust for you. You didn’t include the earnings on your tax return and you didn’t file the FBAR.  Result: IRS will assert a $10,000 penalty.

Your family members in the Philippines set up a bank account in your daughter’s name the day she was born. Your parents and other relatives have been adding to it ever since. By age 16, there’s over $100,000 in it. You forgot about it and didn’t know how much money was in the account. You haven’t picked up the income as kiddie-tax on your return and you didn’t file the FBAR. Result: Minimum $10,000 penalty and since the balance in the account is over $100,000, the penalty could rise to 50% of the account value per year after the reporting is caught up.

You have pension accounts in Germany that you won’t be touching until you retire; they might include Social Security-like accounts you didn’t realize were not taxable or foreign-issued life insurance policies with a cash value.  If the aggregate value of the accounts at any time during the calendar year exceeded $10,000 and you did not file the FBAR, the IRS will be asserting a penalty of $10,000 per undisclosed account!

What Should You Do?

We encourage taxpayers who are concerned about their undisclosed offshore accounts to come in voluntarily before learning that the U.S. is investigating the bank or banks where they hold accounts. By then, it will be too late to avoid the new higher penalties under the OVDP of 50% percent – nearly double the regular maximum rate of 27.5%.

Don’t let another deadline slip by. If you have never reported your foreign investments on your U.S. Tax Returns or even if you have already quietly disclosed or you are in the 2012 Offshore Voluntary Disclosure Initiative (“OVDI”), you should seriously consider participating in the IRS’s 2014 Offshore Voluntary Disclosure Program (“OVDP”). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco, San Diego and elsewhere in California qualify you for OVDP.

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