US foreign asset and account reporting is a strange thing. You could be a Colombian drug lord with pallets of cash too large to count. And guess what. Ownership of what could be billion of dollars in cash stored offshore is not reportable on a FATCA From 8938 or an FBAR (FinCEN Form 114).
Yet, there are things perhaps less notorious than pallets of cash, like a retirement account, that are reportable to the IRS. How is this law "catching criminals" as originally intended?
Enter the FBAR and Form 8938.
There is a lot of confusion when it comes to understanding reporting requirements for offshore accounts, and the IRS likes it that way. The more errors that are made in reporting (or non-reporting), the more penalties the IRS can assess. We have had many clients come to us because they thought filing an FBAR meant they didn't have to file Form 8938, or vice-versa.
The FBAR – FinCEN form 114
The government wanted to crack down on international crime syndicates and created the 'Bank Secrecy Act of 1970' to prohibit banks from helping criminals move money around the world. Banks were suddenly required to report suspicious activity to the US Treasury Department, and individuals were required to fill out an FBAR if they had certain foreign financial accounts.
Penalties
If you do not file your FBAR, the IRS can impose one of two penalties:
- A non-willful penalty, not to exceed $10,000, may be imposed on any taxpayer who violates or causes any violation of the FBAR filing and record keeping requirements
- A willful penalty may be imposed on any taxpayer who willfully fails to file the FBAR, with the cap on the penalty being the greater of $100,000 or 50% of the balance in the account at the time of the violation
While there are reporting thresholds based on the value of the accounts, bear in mind that you need to report your account regardless if it makes money or not.
Form 8938 – Statement of Specified Foreign Financial Assets
FATCA filing requires reporting for specified foreign financial assets on Form 8938. The Form 8938 filing requirement does not replace your obligation to file an FBAR — you must file each form and can get penalized on each form individually.
Penalties
- If you fail to file Form 8938, the penalty is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency (up to a maximum of $50,000 per return)
- There is an additional substantial understatement penalty of 40% on underpayments of tax attributable to non-disclosed foreign financial assets
The big news here is how failure to file or filing incorrectly affects the statute of limitations the IRS has to assess your taxes. For FBAR penalties, the statute is 6 years. For Form 8938 penalties, the statute is… wait for it… forever. Yup. Forever. And that doesn't just apply to Form 8938, it applies to your entire tax return and every year can be audited:
- If you fail to file Form 8938 or fail to report a specified foreign financial asset that you are required to report, the statute of limitations for the tax year may remain open for all or a part of your income tax return until 3 years after the date on which you file Form 8938
- If you do not include in your gross income an amount relating to one or more specified foreign financial assets and the amount you omit is more than $5,000, any tax you owe for the tax year can be assessed at any time within 6 years after you filed your return
Are you at risk?
The IRS must conduct a "risk" assessment before they decide to go after someone. The risk is that they might spend a lot of resources and wind up with nothing to show for it.
So who are their targets? They're not going after billionaires — billionaires tend to have political clout and monstrously large legal teams behind them. The IRS wants to go after a taxpayer that has enough assets where the time spent on the case will be worth the amount the IRS can get from the taxpayer, but also want to increase the chances of winning by attacking someone who may not understand that they can fight what the IRS is saying.
We may not agree with FATCA, but understand that right now it's impossible to ignore the IRS and FATCA reporting requirements. What we can do is educate people to let them know they can fight back, and represent them if they need help standing up to the IRS. If you are concerned about any unfiled or misfiled reporting requirements contact us to schedule a complimentary, confidential consultation. Call us at 888-727-8796 or email info@irsmedic.com.
