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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.

flagsWe’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 wynne@bbcpa.com or 301.272.6019.   

 

Picture 1(2)The Foreign Account Tax Compliance Act, or FATCA, is frequently referenced in the news as the cause of global bank transparency. In reality, though, bank secrecy was really broken by the John Doe summons. In 2008, the John Doe summons blew the lid off the hushed world of Swiss banking. A judge allowed the IRS to issue a John Doe summons to UBS for information about U.S. taxpayers using Swiss accounts. Continue Reading…

Haven’t seen AMC’s TV series, Breaking Bad? You don’t know what you are missing. A high school teacher, Walter White, turns into a major drug dealer, murderer, and tax advisor. While morality may not be his strongest suit, tax advice is clearly his weakest. Don’t worry; there aren’t any series finale spoilers in this post. Continue Reading…

ty_warner_beanie_collector_1If you grew up in the 90s, you might feel like there really is nothing pure left in this world.

Ty Warner, the creator of the popular pellet-stuffed animals like Legs the Frog, Spot the Dog, and Chocolate the Moose, agreed to plead guilty to tax evasion charges. Continue Reading…

If you’ve skimmed the morning paper over the past few years, there is a good chance you’ve come across stories involving tax evasion, offshore bank account ownership, and wealthy individuals receiving jail sentences for partaking in such schemes. In recent times however, many U.S. citizens have come to face the harsh reality that being a member of the ultra-wealthy coterie is not the only way to get the IRS’s attention. Continue Reading…

Edward Snowden’s whistleblowing escapade has finally landed him in Moscow and out of the transit zone of the Sheremetyevo airport.

While on the run, the U.S. government has revoked his passport and has charged him with espionage and theft of government property. His consulting job with Booz Allen Hamilton allowed Snowden to access National Security Agency documents and he leaked a number of details regarding U.S. government surveillance program to the press and other sources.

Continue Reading...

On June 30, Treasury Form TDF 90-22.1, commonly known as an “FBAR,” is due. Read on to learn more.

Continue Reading...

Although the Internal Revenue Service had to omit some major tax provisions from its inflation adjustment announcement last week, around two dozen items had their amounts bumped up for next year.

Here are some of the more widely used individual tax provision amounts that will change in 2013.

Kiddie tax: Although this moniker may sound like it’s a tax break for youngsters, sort of the child’s menu of the tax code if you will, the kiddie tax actually could cost you more.

Officially known as the Unearned Income of Minor Children Taxed as if Parent’s Income Tax, it requires, as per its name, that a child’s investment earnings exceeding a certain amount be taxed at their parents’ usually higher tax rate.

The kiddie tax was created in 1986 to prevent parents from putting money into investment accounts held in the names of their lower-taxed children.

Basically, a portion of the kids’ earnings remain tax free, with another chunk of investment income being taxed at the kiddies’ tax rate.

But when the earnings exceed the combination of the tax-free and low-tax amounts, then their parents’ tax rate kicks in. The earnings affected by the kiddie tax are reviewed each year for possible inflation bumps.

For 2013, parents will have to deal with the kiddie tax when a youngster’s investment earnings exceed $2,000. That’s $1,000 tax-free for your little angel and $1,000 at the youth’s tax rate. The 2013 amount is $50 more than the $950 allowed for both a child’s unearned income categories this year.

Gift tax exclusion: A simple way to reduce an estate’s taxable value is to give some of it away before you pass away.

Not only will this assist you in getting your estate below the taxable threshold, which is still up in the air for next year since the current estate tax law expires on Dec. 31 and Congress could make changes before or by (or even after) then, but this exclusion also allows you to receive the thanks of your grateful recipients. Double win!

In 2012 you can give up to $13,000 to as many separate individuals — and they don’t have to be your family (hint, hint) — as you want without any tax implications for you or the people to whom you give the money.

In 2013, you’ll be able to reduce your taxable estate by giving away $14,000 per person.

Deductible long-term care premiums: In 2013, you’ll need more medical expenses — 10 percent of your adjusted gross income instead of the current 7.5 percent — before you can claim them on Schedule A.

To help you reach the medical deductions threshold, you can include the deductible portion of eligible long-term-care insurance premiums. These amounts are based on your age and are adjusted annually for inflation. For 2013 they are:

Age Before the End of the Tax Year Limitation on Premiums
40 or younger $360
Older than 40 but not more than 50 $680
Older than 50 but not more than 60 $1,360
Older than 60 but not more than 70 $3,640
Older than 70 $4,550

Foreign tax provisions: Several inflation-affected tax areas involve foreign considerations. They include:

  • The amount of foreign earned income that taxpayers working abroad can exclude increases from $95,100 in 2012 to $97,600 in 2013.
  • The first $143,000 of gifts in 2013 to a spouse who is not a U.S. citizen will not be included in taxable gifts. That’s $4,000 more than allowed this year.
  • A U.S. person receiving aggregate foreign gifts exceeding $15,102 in 2013 will be required to file an information return. That’s $379 than in 2012.

Tax expatriates also will see some inflation adjustments in 2013.

An individual next year is treated as leaving the United States primarily to avoid tax if his or her “average annual net income tax” is more than $155,000 for the five taxable years ending before the date that person gives up U.S. citizenship.

Expatriates also face an exit tax when they give up their citizenship. In 2012, that tax can be avoided if the person’s deemed sale asset value is less than $651,000. In 2013, that value to avoid the expatriation tax goes to $668,000.

You can check out the other tax laws with 2013 inflation adjustments in Rev. Proc. 2012-41. And stay tuned for the IRS’ final word on the areas where it’s waiting for Congressional action.

JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.