February 13, 2012 9:28 am

Your Responsibilities for Reporting Foreign Assets and Accounts

U.S. citizens and residents are taxed on their worldwide income. Some taxpayers, however, fail to include income from assets and accounts held overseas. The government is cracking down on such taxpayers by working with foreign banks to discover the names of depositors. Taxpayers found with undisclosed foreign accounts can be heavily penalized.

Reporting

There are two distinct reporting requirements for taxpayers; there may be some overlap but both reports are required if taxpayers meet the applicable thresholds:

  • Filing new Form 8938 with Form 1040 to report specified foreign financial assets (SFFAs). This reporting falls under the Foreign Account Tax Compliance Act (FATCA), which was enacted in 2010.
  • Filing Form TD F 90-22.1 with the Treasury by June 30 (no extensions can be granted) to report foreign financial accounts (e.g., bank accounts, brokerage accounts). This reporting, which has been required for many years, is referred to as FBAR (foreign bank and financial accounts report).

Filing thresholds. When reporting is required depends on the amount of foreign assets or accounts. A report on foreign accounts is required if they hold in the aggregate more than $10,000.

The reporting threshold for FATCA depends on filing status and whether the taxpayer is living within the U.S. or abroad.

  • For those within the United States, Form 8938 must be filed with the 2011 Form 1040 if SFFAs exceed $50,000 on the last day of the year or $75,000 at any time during the year ($100,000/$150,000 for joint filers).
  • For those living outside the United States, the threshold is $200,000 on the last day of the year or $300,000 at any time during the year ($400,000/$600,000 for joint filers).

Penalties

Taxpayers required to file returns for foreign assets and accounts but who fail to do so can be penalized. The penalties are:

  • For Form 8938: starting at $10,000, plus 40% of any underpayment
  • For Form TD F 90-22.1: up to the greater of $100,000 or 50% of the account balance at the time of the violation of not reporting

Extension of the FBAR voluntary disclosure program

In an effort to get taxpayers to come forward and disclose their foreign accounts before the IRS finds out about them, there is a special program that can be used to minimize penalties. Early in January 2012, the IRS announced a third offshore voluntary disclosure program; one program ran in 2009 and another in 2011. This new program has no deadline for participation. The IRS collected $3.4 billion from the first program and thus far $1 billion from the second program; it hopes the new program will be equally successful from a revenue perspective.

To qualify for the program, a taxpayer must:

  • File amended returns back to 2003 if foreign income needs to be included on these old returns.
  • Sign Form 872, which extends the statute of limitations for these closed years.
  • Sign a special consent form to extend the limitations on assessing foreign bank account report penalties.
  • Pay a penalty of 27.5% (12.5% for “small” offshore accounts not exceeding $75,000).

Taxpayers who have not yet disclosed their foreign accounts should discuss their situation with a tax professional, who can determine whether participation in the new program is advisable.

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Factoids
FACT: 

Charities: Did You Know?

  • There are more than 300,000 IRS-approved charities.
  • In 2008 (the most recent year for statistics), these charities took in $1.4 billion in donations.
  • Of the top 10 charities (by assets), 7 are educational institutions, with Harvard, Yale, and Stanford topping the list.

Source: IRS (www.irs.gov/pub/irs-soi/11esgiftsnap.pdf)

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