If you are a U.S. citizen, resident alien, or certain nonresident alien, you are required to report any foreign financial assets that meet the reporting threshold to the IRS. There are different filing requirements and it just depends on the type of assets and the reporting thresholds to determine the filings an individual is required to complete. Failure to complete the required filings can carry significant penalties.
Form 8938 – Statement of Specified Foreign Financial Assets
On an individual’s income tax return, Schedule B asks whether the individual owns any foreign accounts. If the assets exceed a certain threshold, which (for individuals) is $50,000 on the last day of the tax year or $75,000 at any time during the tax year, the individual is required to file with their return Form 8938. If you fail to file Form 8938, the penalty can be up to $10,000 plus an additional $10,000 for each period of 30 days of non-filing. The maximum penalty is $60,000, however, criminal penalties may also apply.
Form 114 – Report of Foreign Bank and Financial Accounts (FBAR)
This report may also be required if the individual owns foreign accounts that exceed $10,000 (as an aggregate value) at any time during the year. The penalty for failing to complete this report can be up to $10,000 if noncompliance is “non-willful” and the greater of $100,000 or 50% of the account balances if noncompliance is “willful.” Criminal penalties may also apply in this instance as well.
For a chart on the difference between the Form 8938 and FBAR filings, click here.
Offshore Voluntary Disclosure Programs
In 2009, 2011 and again in 2012, the IRS offered offshore voluntary disclosure programs to encourage individuals to disclose their foreign financial assets and any undisclosed income from offshore accounts. While the programs do not exempt the individual from any potential penalties, the programs allowed for individuals to get current on any delinquent taxes incurred from offshore funds. In June 2014, the IRS modified the 2012 program. The modifications became effective on July 1, 2014. For frequently asked questions on the program and more information the submission requirements, click here and here.
If you have offshore funds and are unsure whether you meet the reporting thresholds, have not disclosed your foreign accounts or need more information on the reporting requirements and disclosure program, be sure to seek advice from the proper legal counsel and/or tax professional.