American citizens and residents, green card holders and entities organized in the U.S., have to file a foreign bank account report (FBAR) if the sum of the highest values in all reportable foreign financial accounts was more than $10,000 at any time during the calendar year. Foreign account is generally an account maintained in the financial institution outside of the United States. It is important to emphasize here that a highest value in an account should be determined by comparing running balance in the account throughout the year, and not just taking the December 31 value, unless the December 31 balance was the highest during the year.
Reportable foreign financials accounts include accounts owned directly or indirectly, individually or jointly, as well as accounts with only a signature authority and no financial interest.
Some examples of accounts reportable on the FBAR:
FBAR (FinCEN Form 114) must be filed by October 15 directly with the office of Financial Crimes Enforcement Network (FinCEN), a bureau of the Department of the Treasury, separate from the IRS. FBAR is not part of the income tax return.
It is very important to be compliant with FBAR filing obligations as civil penalties for late filing of the FBAR, or for filing an incorrect FBAR can be up to $10,000 for non-willful violation, and much higher for willful violation, up to 50% of the account value, or higher. Criminal penalties may also be imposed.
Another form that may be required to be filed to disclose foreign financial assets is form 8938 Statement of Specified Foreign Financial Assets. This form must be filed if the combined balance of reportable foreign financial assets exceeds threshold amounts for the filing status. Information reported on from 8938 partly duplicates that on the FBAR, but some accounts reportable on the FBAR are not included on form 8938, while other financial assets not subject to reporting on the FBAR must be disclosed on form 8938.
Thresholds for form 8938 are much higher than the threshold for filing the FBAR, and depend on filing and residence statutes.
Form 8938 is filed as part of an income tax return and is required only if the tax return is required. The due date to file form 8938 is the same as the due date for a tax return (including extensions).
Penalty for failure to timely file a correct Form 8938 may be $10,000, with up to $50,000 additional penalties in case of continuing failure to file if the IRS sent a notice that a form was not filed.
There are a few ways to avoid penalties for filing the FBAR and form 8938 late.
According to the IRS (emphasis added), “taxpayers may attach a reasonable cause statement to each delinquent information return filed for which reasonable cause is being asserted. During processing of the delinquent information return, penalties may be assessed without considering the attached reasonable cause statement. It may be necessary for taxpayers to respond to specific correspondence and submit or resubmit reasonable cause information”.
What it means in practice, is that submitting delinquent form 8938 (and other international information returns) outside of any voluntary disclosure program, such as streamlined procedures, may be a more difficult and uncertain way to get back on compliance track without penalties, and careful consideration of the available options must be given before choosing the path for filing late form 8938 (and other information returns).
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