Under the Foreign Account Tax Compliance Act, U.S. taxpayers holding financial assets outside the U.S. must report those assets to the IRS using Form 8938, Statement of Specified Foreign Assets, which is attached to your annual return.
However, in order to make reporting easier, the IRS limits your responsibilities. First, to be reportable, the aggregate value of your foreign assets must exceed $50,000. Also, if you don't have to file an income tax return for a tax year, you don't have to file Form 8938, regardless of the value of your specified foreign assets.
Although Form 8938 is only three pages long, the instructions are 14 pages long and define the strict procedures for properly filling out the form. For example, you have to convert the value of foreign holdings into U.S. currency, and the IRS has specific rules on how to calculate the value of assets and what exchange rates to use. Also, the IRS clarifies what is and is not a foreign account — the dividing line can be difficult to find. Sometimes, an account may appear to be foreign, but the IRS considers it to be domestic, and thus it is not reportable on that form. For example, an account at a foreign branch of a U.S. bank is not reportable, and neither is an account at a U.S. branch of a foreign bank.
That form is just the beginning. You may also have to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). The Financial Crimes Enforcement Network is a bureau of the U.S. Department of the Treasury that collects and analyzes information about financial transactions to combat domestic and international money laundering, terrorist financing and other financial crimes. The FBAR can also be complicated, but like the IRS, FinCEN permits you to hire a tax preparer to file it on your behalf.
Take reporting seriously
You must file FinCEN Form 114 if the aggregate value of your foreign accounts exceeds $10,000 at any time in the calendar year. The IRS makes available a comparison table to help you determine whether you need to file IRS Form 8938, FinCEN Form 114 or both. Although this table is clear and helpful, the provisions can be complicated, and it's likely you'll want to work with a financial professional. Failure to report foreign financial assets on Form 8938 may result in a penalty of $10,000 on up to $50,000 if you continue to fail to report after IRS notification.
Although some taxpayers may assume that the IRS is unlikely to find out about foreign holdings, ignoring the taxman is a dangerous (and illegal) strategy. Notes the IRS: "Foreign financial institutions may provide to the IRS third-party information reporting about financial accounts, including the identity and certain financial information associated with the account, which they maintain offshore on behalf of U.S. individual account holders."
Underpayments of tax attributable to nondisclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40%. Criminal penalties may apply as well.
Again, there are a lot of complex provisions in these forms, and your best bet is to work with a qualified tax preparer.
Newsletter articles are posted every 2 weeks.
If you would like to have our e-newsletter delivered directly to your inbox, please sign up. Your information is confidential; you can unsubscribe at any time. Subscribe.