Practitioners who have clients with overseas accounts should alert them now that the FBAR (Foreign Bank and Financial Accounts Report) form must be received by the Department of Treasury no later than June 28 this year. Although the actual due date is June 30, this year it falls on a Sunday and there is no extension of the due date when it falls on a weekend.
FBAR should not be confused with FATCA (Foreign Account Tax Compliance Act), which was enacted as part of the HIRE (Hiring Incentives to Restore Employment) Act. The FATCA form, IRS Form 8938, is filed with the tax return, while the FBAR form, TF 90-22.1, is filed by the end of June of the year following the account activity it reports.
FBAR requires disclosure of foreign accounts aggregating over $10,000 at any time during the year, and has a set of penalties running as high as 50 percent of the account value per year.
FATCA has a higher threshold than FBAR, and its form, FATCA Form 8938, is filed with the tax return. A married couple living in the U.S. and filing a joint tax return are not required to file Form 8938 unless their total specified foreign assets exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the year. It is not required from individuals who do not have a return filing requirement.
Although both forms ask for similar information, FATCA has its own set of penalties. Failure to file can result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification. In addition, a 40 percent penalty on any understatement of tax attributable to non-disclosed assets can be imposed.
In practice, this can be a little confusing. For example, if a taxpayer holds an account with $95,000 on December 31, but $145,000 on July 1, the taxpayer would have to file FBAR form TF 90.22.1 before the end of June the following year, but would not have to file FATCA Form 8938 with the tax return. If all this is a little confusing to practitioners, consider how confusing it is for taxpayers.
Add in the possibility of enormous penalties that might be imposed under both sets of rules, and the fact that it is possible to be in violation of them unwittingly (for example, by inheriting an account from a relative in a foreign country) and you get a tax preparer’s nightmare. In fact, the penalties under FBAR of 50 percent of the account value per year can actually be more than the value of the account.
Thankfully, the Offshore Voluntary Disclosure program, now in its third iteration since the first one in 2009, allows taxpayers to come forward and disclose the existence of an account to the IRS and pay a penalty. In its current form, the program calls for a high penalty of 27.5 percent of the highest aggregate balance in the account during the eight full tax years prior to the disclosure.
That’s a bit more than the high of 25 percent in the 2011 program, but much more forgiving than the 50 percent per year in the normal FBAR penalty structure.
While the two previous voluntary disclosure programs had deadlines, the current one is open ended. However, the IRS reserves the right to close it at any time. So, if you have clients that you suspect may hold an offshore account, now is the time to have a conversation with them.