U.S. citizens and residents as well as specified domestic entities (e.g., domestic trusts), are taxed on their worldwide income. When foreign accounts exceed a set amount, such taxpayers are required to report annually on their holdings. This is in addition to including the income earned on these foreign accounts on their tax returns. These reporting requirements are not new, but individuals continue to slip up and pay severely for their mistakes, intentional or unintentional.

Annual Reporting

There are two types of annual reports: one required by the Bank Secrecy Act filed with the U.S. Treasury (referred to as the FBAR report because the name of the form used for reporting is Report of Foreign Bank and Financial Accounts) and another Form 8938 Statement of Specified Foreign Financial Assets is required by the Foreign Account Tax Compliance Act (FATCA) to be filed with the IRS. Individuals may be required to file one or both of these forms annually.

FBAR. This report is required for U.S. persons, which include U.S. citizens, resident aliens, trusts, estates, and domestic entities that have an interest in foreign financial accounts and meet the reporting threshold. The reporting threshold is having financial accounts with the aggregate value exceeding $10,000 at any time during the calendar year. This report is filed with the Financial Crimes unit of the U.S. Treasury on FinCEN Form 114 via the BSA-E-Filing System (i.e., it must be filed electronically).

The report is due annually on April 15. However, there is an automatic six-month filing extension. Thus, anyone who failed to file by April 15, 2019, has until Oct. 15, 2019, to meet the extended filing deadline for the 2018 form. The IRS has a Fact Sheet on FBAR reporting (FS-2019-7, April 2019).

The Form 8938 is required to be filed by U.S. citizens and residents living in the United States if they are:

• Unmarried taxpayers (and married taxpayers filing separately) with the total value of specified foreign financial assets of more than $50,000 on the last day of the year or more than $75,000 at any time during the year; or
• Married taxpayers with the total value of specified foreign financial assets of more than $100,000 on the last day of the year or more than $150,000 at any time during the year.

For U.S. citizens or residents living abroad as a bona fide foreign resident or with at least 330 full days during any 12 consecutive months in a foreign country, filing is required if they are:

• Unmarried taxpayers (and married taxpayers filing separately) with the total value of specified foreign financial assets of more than $200,000 on the last day of the year or more than $300,000 at any time during the year; or
• Married taxpayers with the total value of specified foreign financial assets of more than $400,000 on the last day of the year or more than $600,000 at any time during the year.

For specified domestic entities, the threshold is having total value of foreign financial assets more than $50,000 on the last day of the tax year, or more than $50,000 at any time during the year. However, even if a person meets the filing threshold, no report is required if the person is not required to file an income tax return for the year.

The Form 8938 is attached to the taxpayer's return (e.g., Form 1040 for individuals). If a taxpayer has a filing extension for the income tax return, then it applies to Form 8938 as well.

There are considerable differences in how each of the reporting requirements operate. For example, the definition of when a taxpayer has an interest in a foreign asset varies between FBAR and FATCA. The IRS has a chart—Comparison of Form 8938 and FBAR Requirements—comparing these two filing requirements.

Penalties

If required reporting is not timely done, then penalties can apply. It should be noted that the Offshore Voluntary Disclosure Program (OVDP), which had been available as a type of amnesty program to enable taxpayers to come into compliance with reduced penalties, ended on Nov. 20, 2018. It ended because of a significant decline in the number of taxpayers participating in it.

For non-willful taxpayers that fail to comply and have reasonable cause for said failure there is potentially still some relief from the full application of penalties either under the Streamline Filing Compliance program as discussed below or through the IRS' Delinquent International Information Return Submission Procedures or the Delinquent FBAR Submission Procedures.

FBAR. The failure to file FBAR can result in civil and/or criminal penalties. For example, the civil penalties for a non-willful FBAR reporting failure generally range from $500 to $10,000 adjusted for inflation and is applied per account, depending on the severity of the failure (31 U.S.C. §5321(a)(5)). (The top penalty assessed after Jan. 15, 2017, is $12,921.) But for willfulness, the penalties are onerous: $100,000 adjusted for inflation (currently $129,210) or 50% of the highest balance of the account. Thus, it is possible that civil penalties for FBAR violations can exceed the current balance in the foreign financial account (31 U.S.C. §5314(a)(5)). Note that the statute of limitations on the assessment of civil penalties for the failure to file an FBAR report is six years, beginning on the date the report is due (whether or not it is filed).

Penalties can be waived if the failure to file is non-willful. Checking the “no” box on Schedule B of Form 1040 to indicate having no foreign accounts and not filing required FBAR returns show willfulness (Horowitz, DC-MD, 1/18/19).

The penalties can be applied per account. For example, the government was allowed to impose 13 separate FBAR penalties related to the taxpayer's 14 financial accounts held in U.K. banks (Boyd, DC-CA, 4/23/19).

The penalties may even survive death. A U.S. District Court denied a motion to dismiss the government's collection efforts of more than $3.5 million in civil penalties against a decedent's family members, who were beneficiaries of a revocable trust that became irrevocable on the decedent's death (Park, DC-IL, 5/24/19).

If Form 8938 is required but not filed, there is a failure-to-file penalty of up to $10,000. If the error is not corrected within 90 days of notice from the IRS, there can be an additional penalty of $10,000 for each 30-day period of continued failure to file, for a maximum of $50,000. However, where the failure to file is not willful, a taxpayer can use streamlined filing compliance procedures (the IRS has a video on this at www.irsvideos.gov) to submit forms missing for the prior three years and pay a penalty of 5% of the high year-end balance of the account over the preceding six years.

If there is an underpayment of tax due to fraud, the penalty is 75% of the underpayment. In addition to civil penalties, there may be criminal penalties.

Extent of IRS investigations

Over the years, the IRS has conducted extensive investigations of foreign banks suspected of assisting U.S. taxpayers in hiding assets abroad in order to evade U.S. taxes. For example, a decade ago Switzerland's largest bank, UBS, settled with the Treasury for $780 million and turned over the names of 4,450 U.S. account holders. This year, two Swiss insurance companies entered into non-prosecution agreements with the Department of Justice, paying a $5.1 million penalty and agreeing to cooperate in any related civil and criminal proceedings in the United States.

The government has expanded its investigations to include law firms. A U.S. District Court denied a petition by a law firm to quash an IRS summons to obtain the names of the firm's clients. The IRS audited one client who used the firm to set up foreign accounts, foreign trusts, and foreign corporations to avoid paying U.S. taxes (Taylor Lohmeyer Law Firm, PLLC, DC-TX, 5/15/19). The firm's argument against the summons based on attorney-client privilege was not honored, the petition to quash was dismissed, and the IRS could enforce the summons. As a general rule, the identity of a client is a matter not normally within the privilege. No exceptions to the general rule applied in this case.

Conclusion

The reporting of foreign assets is an issue for many U.S. taxpayers. At the American Bar Association Taxation Section's annual meeting in May 2019, an IRS representative indicated that the IRS continues to have the reporting of interests in foreign financial accounts in their sights.

Note: There are several other International Information Returns (such as the Form 5471, Form 926, etc.) that are required to be filed by certain U.S. taxpayers. These filing requirements relate to interest in foreign entities and may overlap with the FBAR and Form 8938 filing requirements. These other forms were not addressed by this article and should be considered in addition to the FBAR and Form 8938.

Sidney Kess, CPA-attorney, is of counsel at Kostelanetz & Fink and senior consultant to Citrin Cooperman & Company. Chaya Siegfried CPA MST, partner in charge of international tax at Withum, Smith + Brown, P.C., contributed to the preparation of this article.