“You can run but you cannot hide.”
That may be the unofficial motto of the federal government and the agencies tasked with enforcing its tax and banking laws.
No matter where you live—Paris, France, or Paris Texas—all U.S. citizens and permanent residents are required to report their income worldwide on their U.S. income tax returns. This means that all income you make anywhere in the world is taxed by the IRS, regardless of the fact that it’s taxed somewhere else.
The first thing that you need to do if you have an interest in foreign accounts or assets is note it on your personal tax returns—your Form 1040 annual filing, at 1040, Schedule B, Section III, Question 7(a).
In addition, you must comply with the provisions of the Bank Secrecy Act of 1970. These laws address worldwide income, and the FBAR FATCA filing requirements for foreign accounts in which U.S. citizens and permanent residents may have an interest. The two primary forms are the FBAR (Financial Bank Account Report – Form FinCen 114), and Form 8938 pursuant to FATCA, the Foreign Account Tax Compliance Act.
FBAR refers to Form 114, Report of Foreign Bank and Financial Accounts. This form must be filed with the Financial Crimes Enforcement Network (FinCEN), a bureau of the Treasury Department. Note that Form 114 must be filed electronically and is only available online through the BSA E-Filing System website, which is administered by FinCEN, not the IRS.
An FBAR is required of all U.S. citizens and resident aliens – including individuals who have dual citizenship who’ve lived or worked abroad during all or part of the year – if they have a U.S. tax liability. Also, all U.S. persons with foreign bank accounts must also file an FBAR if the aggregate value of all their foreign financial accounts (i.e., accounts that they own in whole or in part, or for which they have signature authority) exceeds $10,000 at any time during the year.
The FBAR filing requirement isn’t part of your annual income tax return. As mentioned, the FBAR Form 114 is filed separately and directly with FinCEN. The FBAR filing requirement typically applies even if a taxpayer qualifies for certain tax benefits relative to their foreign accounts, like the foreign earned income exclusion or the foreign tax credit—two items that can reduce significantly or eliminate their U.S. tax liability for these foreign accounts. These tax benefits aren’t automatic and only are available if an eligible taxpayer files a U.S. income tax return.
The FBAR is due on April 15th for the year following the calendar year being reported. You’re allowed an automatic extension to October 15th if you fail to meet the FBAR annual due date of April 15th. Also, you don’t need to request an extension to file the FBAR, as you do with your personal tax return (Form 1040).
What About Non-Residents?
Non-resident aliens who received income from U.S. sources also must determine whether they have a U.S. tax obligation. The filing deadline for nonresident aliens may be April 15th or June 15th, depending on their sources of income.
If you are in violation of the FBAR filing requirements, you should speak to an experienced FBAR attorney at Ely J. Rosenzveig & Associates about the best options available to you to cure the violation, including correcting past mistakes by filing an amended or past due return.
An individual may be subject to severe penalties for a willful failure to file FBAR. Penalties for the willful failure to file FBAR penalties are up to the greater of $12,921 (in 2020, indexed to inflation) or 50% of the account value. In addition, the individual may face criminal prosecution, as a willful violation, if proven by the government beyond a reasonable doubt, is a felony punishable by up to 5 years imprisonment and fines of up to $250,000.
The penalties for the non-willful failure to file FBAR penalties can be up to $10,000, and $10,000 for every 30 days of non-compliance—up to a maximum of the lesser of $60,000 or 50% of the account balance.
The IRS offered the Offshore Voluntary Disclosure Program (OVDP) from2009 until it expired in 2018 if you’ve committed tax or tax-related crimes and have criminal exposure due to your willful violation of the law. Taxpayers who participate in this program want protection from potential criminal prosecution, relief from the most severe civil penalties, and a relatively accommodating mechanism for being brought back into FBAR-filing compliance. This program doesn’t apply to those with illegal sources of income.
There are several alternatives to the defunct OVDP for FBAR filing non-compliance issues. Among them, are: (i) the streamlined disclosure program (or the Streamline Filing Compliance Procedure (SFCP) for non-willful FBAR reporting issues, whether it is for US residents or for US citizen living abroad (expatriates). The SFCP was introduced in 2012, and is still active; (ii) the Delinquent FBAR Submission Procedures (DFSP) for US taxpayers who failed to file FBARS for their foreign accounts, but do not have any unreported income therefrom; and, (iii) the upgraded and expanded traditional (or original) voluntary disclosure program (VDP) is also available. Ask an attorney at Ely J. Rosenzveig & Associates about these programs, and how they may benefit you.
The IRS Office of Criminal Investigation (CI) takes timely, accurate, and complete voluntary disclosures under consideration when determining whether to recommend criminal prosecution. Know that a voluntary disclosure doesn’t automatically guarantee that you’ll receive immunity from prosecution, but a voluntary disclosure may result in prosecution not being recommended.
As part of a voluntary disclosure, you must cooperate with the IRS in determining your correct tax liability and make good faith arrangements with the IRS to pay in full all tax, interest, and applicable penalties you owe.
The IRS says that a disclosure is deemed timely if the agency receives it before it has:
What’s the Process?
It’s a two-part process to request to participate in the Voluntary Disclosure Program. To apply for the Voluntary Disclosure Program, you must first complete Part I of Form 14457, Voluntary Disclosure Practice Preclearance Request and Application to request preclearance. This step determines your eligibility for the practice but doesn’t guarantee preliminary acceptance into the practice. After you’ve received preclearance confirmation, you must submit Part II of the Voluntary Disclosure Application within 45 days.
CI will review your submission on Part II and determine if you can participate in the program. If you’re approved, CI will send you a Preliminary Acceptance Letter and will forward your file to a civil section of the IRS. Once your case is assigned, an examiner will contact you. You’re required to cooperate with the examiner in providing documents and information.
To participate in the IRS’ Streamlined Foreign Offshore Procedures (SFCP), in addition to having to satisfy the general eligibility criteria, individual U.S. taxpayers, or estates of individual U.S. taxpayers that want to use this program, must:
The non-residency requirement applicable to individuals who are U.S. citizens or lawful permanent residents (such as “green card holders”) is satisfied if, in any one or more of the most recent three years for which the U.S. tax return due date has passed, the individual didn’t have a U.S. residence, and the individual was physically outside the U.S. for at least 330 full days.
The non-residency requirement applicable to those who aren’t U.S. citizens or lawful permanent residents is met if, in any one or more of the last three years for which the U.S. tax return due date has passed, the individual did not meet the substantial presence test, which states that you are treated as present in the U.S. on any day you are physically present in the country at any time during the day (there are some exceptions to this rule).
The SFCP is also available to US citizens who reside in the US, but does require the payment of a mandatory 5% miscellaneous offshore penalty.
When filing a SFCP, the taxpayer must submit any amended or delayed tax returns, and FBAR forms (e.g., FinCen 114 and 8938) that are called for on account of their FBAR-non-compliance. In addition, they must file a certification of non-willfulness.
Form 14653, “Certification by U.S. Person Residing Outside of the U.S. for Streamlined Foreign Offshore Procedures,” is the form used when filling using the Streamlined Filing Program. It is used to certify that the tax delinquency was a non-willful act. You must describe all the personal details that show that the act of not filing as non-willful.
And, the Delinquent FBAR Submission Procedures (DFSP) require the filing of the delayed FBARs and an explanation for the delinquent filing.
FATCA is the Foreign Account Tax Compliance Act, a law that concerns the failure to comply with certain tax rules by U.S. taxpayers with foreign accounts. FATCA sets out certain reporting requirements for U.S. taxpayers and foreign financial institutions.
As mentioned above, federal law requires all U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts.
Unless your case qualifies for an exception, you must file Form 8938 if you’re a specified person that has an interest in specified foreign financial assets and the value of those assets is more than the applicable reporting threshold.
Am I a Specified Person?
The IRS says that you’re a specified individual if you are one of the following:
You’re a resident alien if you’re treated as a resident alien for U.S. tax purposes under the green card test or the substantial presence test. If you qualify as a resident alien under either rule, you are a specified individual.
If you’re a dual resident taxpayer who determines his or her income tax liability for all or a part of the tax year as if he or she were a nonresident alien as provided by IRS regulations.
What are the Reporting Requirements for Specified Individuals?
Again, as a US taxpayer, you must use Form 8938 to report specified foreign financial assets if the total value of all the specified foreign financial assets in which you have an interest meets or exceeds the appropriate reporting threshold. If you’re a specified individual, your applicable reporting threshold depends upon whether you are married, file a joint federal income tax return, and live inside (or outside) the United States:
If you don’t live outside the U.S., you meet the applicable reporting thresholds and no exception applies, you must file Form 8938 with your income tax return.
Unmarried taxpayers. If you’re not married, you satisfy the reporting threshold only 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.
Married Taxpayers Filing a Joint Income Tax Return. If you’re married and you and your spouse file a joint income tax return, you meet the reporting threshold only if the total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.
Married Taxpayers Filing Separate Income Tax Returns. If you are married and file a separate income tax return from your spouse, you satisfy the reporting threshold only if the total value of your specified foreign financial assets is greater than $50,000 on the last day of the tax year or greater than $75,000 at any time during the tax year.
If your tax home is in a foreign country, you meet one of the presence abroad tests, and no exception applies, you must file Form 8938 with your income tax return if you satisfy the applicable reporting threshold.
Unmarried taxpayers. If you’re not married, you satisfy the reporting threshold only if the total value of your specified foreign financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year.
Married Taxpayers Filing a Joint Income Tax Return. If you’re married and you and your spouse file a joint income tax return, you satisfy the reporting threshold only if the total value of your specified foreign financial assets is greater than $400,000 on the last day of the tax year or greater than $600,000 at any time during the tax year.
Married Taxpayers Filing Separate Income Tax Returns. If you’re married and file a separate income tax return from your spouse, you satisfy the reporting threshold only if the total value of your specified foreign financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year.
You satisfy the presence abroad test if you are either of the following:
FATCA reporting requirements usually only apply to wire transfers that were clearly sent for business purposes. You may be required to report gifts of foreign money to the IRS (i.e., foreign gifts that exceed $100,000 [in IRS Form 3520], or transfers from foreign trusts [Form 3520], or your interest in foreign corporations in which you are an officer, director, or shareholder [Form 5471]).
However, the Bank Secrecy Act rules state when to report wire transfers or deposits to the IRS. This includes:
Yes. U.S. persons and the executors of estates of U.S. citizens must file IRS Form 3520 to report any of the following:
What If I Haven’t Paid Taxes on These Gifts?
If you’re a U.S. expatriate or U.S. citizen who’s living outside the country for an extended period of time, you can get caught up on your delinquent foreign asset or account reporting requirements pertaining to IRS Forms 8938, 3520, 3520-A, and 5471.
The IRS has a “catch-up” program that’s aimed at bringing into compliance eligible individuals, who were non-willful in their reporting non-compliance as to undisclosed foreign income, investments, assets, or accounts pertaining to IRS Forms 8938, 3520, 3520-A, and 5471, without any penalties imposed against the taxpayer.
Non-willful conduct is defined as “conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”
Note that the FATCA Form 8938 requirement doesn’t replace or in any way impact a taxpayer’s obligation to file an FBAR Form FinCen 114. You may be required to file both the FBAR and the FATCA forms, depending on your specific situation.