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Foreign Financial Account Reporting: Form 114 Deadline June 30

Posted 4:45 PM by

The Internal Revenue Service (IRS) has consistently increased its emphasis on compliance related to reporting of foreign financial assets. A U.S. taxpayer who has an interest in or signature authority over certain foreign financial accounts and/or certain foreign financial assets must disclose such holdings annually. Failure to comply with this reporting obligation can result in significant monetary penalties and exposure to criminal prosecution. Additionally, it may result in the statute of limitations related to the affected income tax returns staying open indefinitely.  

The reporting rules can often feel circular and/or duplicative. Individuals must comply with the following process: 

  1. Check the box on Part III, line 7a, on Schedule B of the Form 1040 to report that you had a financial interest or signature authority over a financial account (bank account, securities account, brokerage account, etc.) located in a foreign country.
     
  2. If the aggregate value(s) of the foreign accounts exceed $10,000 at any time during the calendar year, the taxpayer must also file a FinCEN Form 114 (formerly known as TD F 90-22.1) and commonly referred to as an FBAR filing (Report of Foreign Bank and Financial Accounts). This filing MUST be done electronically with the Treasury Department and not the IRS. It is not filed with any tax return and it is due no later than June 30 of the next year with no extensions available.
     
  3. Additionally, if the account balances and the foreign financial asset values are greater than the threshold amounts listed below, Form 8938 (Statement of Specific Foreign Financial Assets) must also be filed as an attachment to the individual’s income tax return.
    • For taxpayers with a filing status of “Single,” Form 8938 must be filed if the balances/value of the accounts as of the last day of the year are more than $50,000 or were more than $75,000 at any time during the year.
       
    • For taxpayers with a filing status of “Married Filing Joint,” Form 8938 must be filed if the balances/value of the accounts as of the last day of the year are more than $100,000 or were more than $150,000 at any time during the year. 

If it is determined that there are undisclosed foreign accounts, there are a couple of ways for the U.S. taxpayer to proceed: 

  1. Begin proper compliance on a go forward basis – this is generally not recommended. It can be high risk given the potential for significant penalties.
     
  2. Quiet disclosures – before discovered under audit by the IRS, the taxpayer files amended income tax returns and FBARs for the missed filings. If there was no income generated or all income was reported but an information return was missed, this may be the best course of action. If there was unreported income associated with the failure to file, this is generally not recommended.
     
  3. Enter the IRS Offshore Voluntary Disclosure Program – this program allows taxpayers to come forward and voluntarily report previously unreported income. By entering this program, the account owner must agree to be subject to examination based on a wider statute of limitations as well as agree to a 27.5% penalty based on the foreign asset values, a 20% accuracy penalty on the amount of income tax due, and interest on the late payment of the income taxes. However, it removes the potential for criminal prosecution as well as the potential for penalties as high as $100,000 or 50% of the highest account value PER violation. 

The penalties associated with not disclosing foreign accounts can be severe and have a dramatic financial impact. We encourage all taxpayers to review their accounts and make sure that they are correctly meeting all filing requirements.  

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