We’ve invited Brian Wynne of Bond Beebe, a Maryland Accounting Firm, to share some insights on FATCA in light of the upcoming June 30 deadline. For more great posts on taxes, estates, accounting, and finance, check out their blog: It’s Taxing.
We’ve been talking with our clients quite a bit the past few years regarding the push surrounding foreign financial reporting and the associated penalties if you don’t comply. The Foreign Account Tax Compliance Act (FATCA) requires that you disclose all ownership of US assets in foreign accounts. This requirement is in place both for individual taxpayers and for foreign financial institutions (which can report your holdings, even if you do not) and carries significant penalties for non-compliance – up to 50% of the value of the interest, and criminal charges may apply.
There is a deadline on the horizon: FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) is due to the U.S. Department of Treasury by June 30. In this post, we’ll provide a high-level explanation FATCA, including what types of assets you need to disclose and what forms are required.
What is FATCA and What Do I Need to Disclose?
Any person or entity subject to the jurisdiction of the United States (including individuals, corporations, partnerships, trusts, and estates) with a financial interest in, or signature or other authority over, bank accounts, securities, or other financial accounts having a value exceeding $10,000 in a foreign country, must report this relationship.
Wait- what exactly does that mean? Bottom line, if you are a US citizen who owns any foreign asset(s) valued at over $10,000, you must report it to the Treasury Department; the IRS threshold for reporting is $50,000.
This requirement doesn’t stop at anything that you yourself own. You also have to file if you have direct or indirect control over a foreign or domestic entity (a company, a partnership, a trust) with foreign financial accounts, even if you yourself do not have foreign account(s). For example, a corporate-owned foreign account would require filings by the corporation and by the individual corporate officers with signature authority.
This requirement isn’t exactly new – you should have been reporting these assets since the 2012 tax year. However, the IRS requirement for foreign financial institutions to report these assets will go into effect on May 5, 2014, which means that these banks will be required to disclose your assets, even if you haven’t.
What is a Foreign Financial Asset?
Not sure if what you own/have interest in counts as a foreign financial asset? Here is a guide to help you determine whether or not (and what) you need to disclose:
- Bank accounts (savings, checking, deposit) and brokerage accounts that are held at a financial institution outside the US.
- Stocks, bonds, and other securities issued by a foreign individual or entity
- Any interest in a foreign corporation, partnership, estate or trust
- Any financial instrument that is issued by a non-US person, as well as any swap or similar agreement
Note that if you have a foreign investment that is held by a US-based account, it does not need to be reported. In addition, foreign real estate, currency, and directly-held tangible assets do not need to be disclosed.
What Forms Do I Have to File for FATCA?
IRS tax forms regarding FATCA are due when your income tax return is due, including extensions. If you fall into one of the below categories, or if you have any direct or indirect foreign interests, you may be required to file applicable IRS forms:
- You are an individual or entity with ownership of foreign financial assets and meet the specified criteria (Form 8938);
- You are an officer, director or shareholder with respect to certain foreign corporations (Form 5471);
- You are a foreign-owned U.S. corporation or foreign corporation engaged in a U.S. trade or business (Form 5472);
- You are a U.S. transferor of property to a foreign corporation (Form 926);
- You are a U.S. person with an interest in a foreign trust (Forms 3520 and 3520-A), or;
- You are a U.S. person with interests in a foreign partnership (Form 8865).
The threshold for disclosing foreign assets to the IRS is $50,000 (total value of the assets). You’ll also need to file FinCEN Report 114 (formerly Form TD F 90-22.1) with Department of the Treasury on or before June 30th for any foreign assets that are valued at $10,000 or above.
What Happens if I Don’t Report Foreign Assets?
There are significant penalties for failing to file these forms. Failure to file IRS Form 8938 can result in a $10,000 penalty, with an additional $10,000 penalty for every 30 day period that it is not filed, up to a maximum penalty of $50,000. Failure to file with the Treasury can elicit a penalty of up to $10,000 per non-willful violation. Willful violations can elicit penalties that are the greater of $100,000 or 50% of the amount in the account for each violation.
The IRS Offshore Voluntary Disclosure Program provides an opportunity to become compliant while eliminating criminal exposure and reducing the civil penalties you may face. More details about this program are available on the IRS website.
As foreign financial institutions prepare to report all accounts held by US citizens and the government continues to ramp up its efforts to curb foreign tax evasion, it’s essential that you disclose your foreign assets. Talk with your CPA to make sure you are in compliance regarding this tricky tax issue.
Brian Wynne, CPA is a Principal at Bond Beebe Accountants & Advisors who specializes in tax preparation and planning for high-net-worth individuals. He can be reached at email@example.com or 301.272.6019.