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Foreign Bank Account Issues

Foreign Bank Account Reporting Requirements:

The IRS over the last couple of years has become very aggressive in the international tax area. This is very evident in the recent cases involving US citizens holding Swiss bank accounts and not disclosing their existence on Form 114 (formerly 90-22.1), Report of Foreign Bank and Financial Accounts. The IRS prosecuted many taxpayers for not disclosing and reporting these accounts and many were fined and are facing additional prosecution.

FATCA Compliance

What is FATCA?

FATCA stands for Foreign Account Tax Compliance Act and it became a law in March 2010.   FATCA has many provisions but its main objectives are:

  • Targeting tax non-compliance by U.S. taxpayers with foreign accounts
  • Ensuring reporting by U.S. taxpayers about certain foreign financial accounts and offshore assets and foreign financial institutions about financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold a substantial ownership interest
  • Ensuring compliance by imposing a withholding tax on foreign financial institutions that do not comply

Why is FATCA different?

FATCA  re-empasizes the reporting of foreign financial assets by US individuals, trusts and businesses.   However, FATCA requires foreign banking institutions to report to the IRS all US individuals and businesses that have foreign financial accounts.   In effect, both US taxpayers and foreign banking institutions are now jointly responsible for reporting.

What are the effects on US taxpayers?

The IRS now has the ability to locate US taxpayers that have offshore financial assets.  In effect, the reporting by foreign financial institutions is similar to US financial entities reporting income to taxpayers and the IRS on Forms 1099.   The IRS will now have the ability to match information received from foreign financial institutions to filed tax returns and immediately issue Notices.

FOREIGN BANK ACCOUNTS

The US government does not tax wealth as such. However, the IRS still wants to know about money in foreign bank accounts especially how it got there and if it produced any income such as interest and/or capital gains. Unfortunately, due to recent legislation, there are two different reporting requirements for foreign bank accounts. These are the "FBAR" and "FATCA" respectively, one or both of which may apply to you. 

The FBAR (Foreign Bank Account Report) has been around since 1972 and should be filed if your aggregate foreign holdings are worth $10,000 or more at any time during the tax year, or if you have signature authority over one or more foreign accounts, for example if you are the treasurer of an association or work in the accounting department of your employer and sign for payments. Starting in 2014 and in succeeding years, the FBAR must be filed electronically as Form 114 with the Department of the Treasury. It should be filed by April 15th each year, (at the same time but separate from Form 1040) with an automatic extension to October 15th if living abroad.

Parallel to that is FATCA (Foreign Account Tax Compliance Act) Form 8938 and should be filed with your Form 1040 if your foreign assets exceed one of the following limits: 

Unmarried or married filing separately living in the US: you should file Form 8938 if your aggregate foreign holdings are worth $50,000 or more on the last day of the tax year or were more than $75,000 at any time during the tax year; 
Married filing jointly and living in the US: you should file Form 8938 if your foreign holdings are worth $100,000 or more on the last day of the tax year or were more than $150,000 at any time during the tax year; 
Unmarried or married filing separately and living abroad: you should file Form 8938 if your foreign holdings are worth $200,000 or more on the last day of the tax year or were more than $300,000 at any time during the tax year; 
Married filing jointly and living abroad: you should file Form 8938 if your foreign holdings are worth $400,000 or more on the last day of the tax year or were more than $600,000 at any time during the tax year. 

Starting Jan 1, 2015, foreign banks, under FATCA, have been reporting directly or indirectly to the IRS, so it is especially important that you file Form 8938 correctly.

If your aggregate foreign bank account holdings exceed the threshold for one or both of these reporting requirements (FBAR and/or FATCA) you would be well advised to consult an international tax expert.

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