Country / Language

Increased Scrutiny Likely on FBAR and 8938 Information Filings


2/20/15

Synopsis
 

Beginning in tax year 2014, the Internal Revenue Service (IRS) will receive U.S. accountholder information from foreign financial institutions. This will put the IRS in the position to match information received from foreign financial institutions (or their respective taxing authorities) with information contained on taxpayers’ tax returns. Accordingly, taxpayers need to pay careful attention to include all required foreign financial asset information on FBAR and 8938 filings.
 
Issue
 
Background
 
The Foreign Account Tax Compliance Act (FATCA), enacted in 2010, requires foreign financial institutions (e.g. banks and investment entities) to report information regarding U.S. accountholders to the IRS. For the 2014 tax year, this information will include the account holder’s: name, address, Social Security Number, account number, and account balance or value. In coming tax years, the information reported will expand to include the revenue earned on the accounts and any capital gain realized. This will allow the IRS to be in the position to match reporting on foreign financial accounts to a U.S. taxpayer’s tax return – a position they are already in with respect to wages and other U.S. income (i.e. W-2 and 1099 reporting). For this reason, it is imperative that taxpayers are compliant with foreign asset reporting requirements.
 
Foreign Bank Account and Foreign Financial Asset Reporting Requirements
 
Generally, U.S. persons having an interest in a foreign bank account or foreign financial asset may be required to file a U.S. information return. Foreign bank account interests are reported on Form 114 (FBAR), which must be filed by U.S. persons having a financial interest in, or even signature authority over, any financial account in a foreign country with an aggregate value exceeding $10,000 at any time during the calendar year. Because this requirement extends to those with signature authority over foreign financial accounts, executives of non-public multinational corporations may find themselves subject to FBAR filing requirements. Foreign asset interests are reported on Form 8938, which must be filed by any specified individual with an interest in specified foreign financial assets maintained by a foreign financial institution exceeding $50,000 in aggregate value.
 
The requirement to file an FBAR has existed since 1970, while the requirement to file Form 8938 was recently introduced in 2010. Only over the past decade has the IRS begun to actively pursue undisclosed foreign bank accounts and the taxpayers owning them.
 
IRS Voluntary Disclosure Programs
 

Failure to file an FBAR may result in civil penalties as high as the greater of $100,000 or 50% of the total balance of the foreign financial account. Failure to file Form 8938 may result in civil penalties up to $50,000. More importantly, criminal charges related to tax matters (e.g. tax evasion, filing a false return, willfully failing to file an FBAR) may also be pursued against taxpayers. For this reason, it is imperative that taxpayers remedy any previously unreported foreign bank accounts and assets, and ensure they are compliant going forward.
 
Currently, the IRS offers three programs to individuals allowing them to disclose previously unreported foreign assets: (1) the 2014 Offshore Voluntary Disclosure Program; (2) the Streamlined Filing Compliance Procedure; and (3) the delinquent FBAR submission procedures. The programs and eligibility for each differ depending on the nature of the omission and whether it was willful or not – which is a highly factual inquiry. Importantly, those already under IRS audit or criminal investigation are not eligible for voluntary disclosure programs.
 
What Does CohnReznick Think?
Keeping in mind the fact that the IRS will now receive financial account information directly from foreign financial institutions regarding U.S. accountholders, taxpayers should determine whether they are subject to reporting their foreign bank account and foreign financial asset information, and file any necessary information returns. If the taxpayer is subject to reporting for 2014, they will want to consider whether they were also required to file any information returns for previous years. Should that be the case, the taxpayer will want to carefully assess their situation to determine whether they are eligible for any of the IRS’s disclosure programs, and fully disclose previously undisclosed foreign assets.

Contact

For more information, please contact James Wall, a CohnReznick principal and the Firm’s International Tax Practice Leader, at james.wall@cohnreznick.com or 646-254-7460, or Manpreet Sangha, a CohnReznick associate, at manpreet.sangha@cohnreznick.com or 646-762-3039.
 
To learn more about CohnReznick’s International Tax practice, please visit our website.


Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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