Ever since the Treasury Department started to crack down on compliance to file the Report of Foreign Bank and Financial Assets, many U.S. persons (individuals, entities and trusts included), have made filing part of the annual tax filing ritual. A simple form with a quirky name, TD F 90-22.1, is filed annually by June 30 following the reporting tax year. What does it involve? In most cases, it requires reporting the account balance and name and address of the foreign banks and institutions for which you held an aggregate account balance over $10,000 at any time during the tax year. If the account balance exceeds higher thresholds, there may be additional reporting with your tax return.
If you earned income on your foreign accounts, you must report that, too. If you aren't aware, U.S. resident taxpayers are taxed on their world-wide income. Income is reportable from any source regardless of the value of the account it is derived from.
Back to the TD F 90-22.1 (a.k.a the FBAR), if you meet the requirements to file and fail to do so, or worse, you "willfully neglect" to do so, you may set yourself up for an expensive pay day benefiting the U.S. Treasury, not to mention possible criminal penalties.
CPAs have been reaching out to their clients to inform them of possible FBAR and foreign filing requirements. For the most part, we've captured our client's attention. Unfortunately, there are a lot of taxpayer's who are not properly informed of their filing obligation, and the non-compliance can be costly. The good news is that there are remedies. If your foreign financial accounts did not generate reportable income, or you always reported the income but did not file required FBAR returns, there is a remedy that will not cost you in penalties. However, if you failed to file the FBAR and DID NOT report the foreign account income in your annual tax return, remedies are available, but at a potentially high cost. The Offshore Voluntary Disclosure Program (OVDP) offers a reduced FBAR penalty and protection from criminal penalties. It can be an expensive proposition, but it hedges your bets against an IRS inquiry. If the IRS finds you before you find them, there is not voluntary program option. The full penalties can range from $10,000 per non-reporting violation to $100,000 or 50% of the account balance at the timeof the violation.
Determining whether you need to file the FBAR can be simple or, at times, complicated. Success in entering the Offshore Voluntary Disclosure Program (OVDP) requires skilled professional guidance and representation. At Meaden & Moore, we have the experience to guide you through the gamut of foreign reporting requirements.
Did I mention that foreign reporting extends to foreign trusts and Passive Foreign Investment Company (PFIC) earnings? Both require specialized reporting and carry the same exposure to non-reporting penalties and criminal penalties as the FBAR. More to come.
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