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Have Foreign Accounts? The Latest IRS FATCA Regs could Increase your Penalty Risk

April 03, 2014

New reg's make it more likely for undisclosed foreign accounts to be ID'd by IRS.

In February, two new sets of IRS regulations were released that affect the Foreign Account Tax Compliance Act’s (FATCA’s) implementation. FATCA requires foreign financial institutions (FFIs) and U.S. taxpayers to report certain information about U.S.-owned foreign financial accounts.

The new regulations generally apply to FFIs; however, increased FFI reporting could make it more likely that undisclosed foreign accounts held by U.S. taxpayers will be identified by the IRS, potentially subjecting these taxpayers to significant back taxes, interest and penalties if the income earned and accounts were not disclosed.

Under FATCA, U.S. taxpayers holding foreign financial accounts are required to file Form 8938, “Statement of Specified Foreign Financial Assets,” with their income tax return if the aggregate value exceeds one of the following thresholds:

  • $50,000 ($100,000 for married couples filing jointly) at the end of the tax year, or
  • $75,000 ($150,000 for joint filers) at any time during the tax year.

Noncompliance can be costly: The penalty for failing to file the form is $10,000, with added failure to file penalties up to $50,000. Additional penalties can include underpayment penalties of up to 40% of the amount of the underpayment. A fraud penalty can also be imposed of up to 75% of the amount unreported.

U.S. holders of foreign accounts could also be subject to Financial Crimes Enforcement Network (FinCEN) reporting requirements — at a much lower threshold: aggregate foreign account value exceeding $10,000 at any time during the calendar year. Account holders subject to the requirements must file Form 114, “Report of Foreign Bank and Financial Accounts (FBAR),” with FinCEN by June 30 of the following year.

Failure-to-file penalties can be high. A person who is required to file an FBAR and fails to properly do so may be subject to a civil penalty not to exceed $10,000 per violation. A person who willfully fails to report an account or account identifying information may be subject to a civil monetary penalty equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation. In addition, there can be criminal penalties of up to $250,000 or five years in jail or both.

Also be aware that you could be subject to certain requirements without being the actual account owner. They may apply to you if, for example, you have signatory authority over an account.
The requirements surrounding foreign financial account reporting are complex. If you think you might be subject to them, please contact us for additional information. We can help you comply with and understand the rules and avoid, or at least minimize, costly penalties.

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