Five Reasons to Start Reporting Your Foreign Bank Accounts
U.S. citizens who have neglected to report foreign accounts they own or have signing authority over may be facing stiff penalties. Many of my clients want to comply with this policy but have concerns about the years they failed to report. Should they file late Reports of Foreign Bank and Financial Accounts, known as FBARs, or just start reporting them going forward? If they file a current-year FBAR, will the Internal Revenue Service flag them for audits of prior years?
One thing that is certain: Continuing to not report their foreign accounts is a bad idea. The consequence for not reporting foreign accounts is costly and stressful. Here are the top five reasons you should start reporting you foreign bank accounts.
1. The IRS will find out
Recent legislation called the Foreign Account Tax Compliance Act, or FACTA, may be the strongest weapon the IRS has had in years. This law allows the IRS to enforce a debilitating withholding tax on foreign banks that do not report their U.S. depositors. The results speak for themselves. Even the strict bank secrecy laws in Switzerland are proving to be no match for FACTA. Almost all the major overseas banks are reporting their U.S. depositors to the IRS.
Even though the IRS receives information on millions of foreign accounts owned by U.S. citizens, thanks to current technology, the agency can easily check this information against its databases. Even if the IRS runs into technical complications processing this information, it will inevitably solve them and become more efficient.
2. The fines are ridiculous and easy to enforce
Can you imagine receiving a tax bill for $100,000 because you forgot to report a foreign account with a balance of $75,000? The current penalty for not reporting a foreign banks account is $100,000 or 50% of the account’s value, whichever is greater. There are mitigating procedures for non-willful failures by account holders with balances under certain thresholds, but using these procedures is at the IRS’ discretion.
What makes these fines so powerful is their simplicity. There is no arguing over taxable income or where the money came from. If you don’t report it, then you are subject to the fine, regardless of whether you inherited the money from your old Aunt Edna. All the IRS needs to prove is that you did not report it.
3. Being compliant is easy and free
U.S. citizens with foreign bank accounts that exceeded $10,000 must report them by June 30 each year. This reporting form, the FBAR, must be e-filed on the Financial Crimes and Enforcement Network website (https://bsaefiling1.fincen.treas.gov) There is no tax due, and for the most part, all you need to submit is your personal information and your foreign banking information such as maximum balance, account number, bank names and addresses. Also, many tax software providers are now offering FBAR solutions. Reporting your foreign accounts with FBAR should be a straightforward process that will only take about 10 minutes per foreign account. There have been complaints about technical problems with the reporting website, but these issues should be remedied soon.
4. Waiting to comply will cost you
Waiting until the IRS sends a letter will end up costing you more time and money. Once the IRS assesses the penalties, you can expect a long and costly battle if you choose to fight. In most cases the taxpayer will need to hire a professional to represent him or her, file delinquent FBARs and amend prior year tax returns, if needed.
5. Special voluntary procedures will likely end
Currently, the IRS has established programs to help willing individuals comply. The two most common are known as the Offshore Voluntary Disclosure Program (OVDP) and Streamlined Offshore Procedures.
These two procedures can help individuals who wish to come forward avoid penalties. Deciding which procedure is best for you depends on several factors and should be discussed with a tax professional. The most common option for taxpayers with foreign accounts that have small to medium balances are the Streamlined Offshore Procedures.
Before July 1, 2014, the streamlined filing compliance procedures were only available to nonresident U.S. taxpayers who owed less than $1,500 in taxes for each of the three covered years. Also, the IRS flagged the amended returns submitted through the program as high risk and usually subject to examination.
However, now the IRS has opened up the Streamlined Offshore Procedures to all U.S. taxpayers, eliminated the $1,500 limit, and will no longer flag amended returns submitted through the procedure as high risk. This is a great option for U.S. taxpayers who have neglected to file their FBARs and wish to become compliant.
If you are a U.S. taxpayer who has neglected to report your foreign bank accounts, now is the time to talk about your options with us, US Tax Consultants. Please do not hesitate to call us from 9am to 2pm, Tuesdays to Fridays.