How much must a taxpayer disclose to the IRS? Well, a lot if it is foreign related. The IRS continues to require more and more disclosure of foreign transactions and foreign assets, and the tax forms related to foreign reporting become more and more complex.
In a series of articles, we will explore various tax forms and your compliance, including what forms should be considered and by whom, what kind of information must be disclosed, when the form is required, and the penalties for not filing. So, let’s get started. Our first article addresses the disclosure of foreign financial assets.
When Do I Need to Disclose Foreign Financial Assets?
Individual taxpayers often find the overlapping foreign asset disclosure rules confusing and frustrating. For most taxpayers with foreign financial assets, two forms need to be considered, Form 114 and Form 8938. FinCEN Form 114 is the Report of Foreign Bank and Financial Accounts (FBAR) disclosure form, while IRS Form 8938 is the Statement of Specified Foreign Financial Assets. Though similar in many ways, the forms sometimes disclose different assets and have very different filing thresholds and requirements.
FinCEN Form 114
The Financial Crimes Enforcement Network (FinCEN) is the bureau of the US Treasury tasked with collecting and monitoring information relating to financial crimes, including money laundering. FBARs are filed with FinCEN, not with the IRS. FBARs have been required for many years, but the form and reporting procedures continue to evolve.
A US person who has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign accounts exceeds $10,000 at any time during the calendar year. “Person” for this purpose includes US citizens, US residents, and entities including corporations, partnerships, trusts, and estates. A “financial interest” is direct ownership in the account or holding of legal title, as well as ownership through an entity if the US person owns more than 50% of that entity. For example, an individual who owns 75% of a corporation would disclose foreign accounts owned by that corporation if the total value of the corporate accounts exceeded $10,000 at any point during the year. Signature authority is the ability to control the disposition of assets in a foreign account and often is separate from the ownership of the assets.
Financial accounts include bank, securities, or brokerage accounts maintained with a financial institution. Also included are options accounts, life insurance with a cash surrender value, mutual funds, and pension or retirement accounts.
Although FBARs are not filed with the IRS, they are due no later than the extended Form 1040 due date of October 15. FBARs must be filed electronically. Failure to file an FBAR can result in a minimum penalty of $10,000.
Form 8938 is filed with a federal tax return and is required if a taxpayer meets the asset value filing threshold for Form 8938 and a tax return is otherwise required. The thresholds are significantly higher than the FBAR threshold and depend on marital status and place of residence. The thresholds are summarized as follows:
Living in the US
Single or filing separately – $50,000 at the end of the year or $75,000 during the year
Married filing jointly – $100,000 at the end of the year or $150,000 during the year
Living outside the US
Single or filing separately – $200,000 at the end of the year or $300,000 during the year
Married filing jointly – $400,000 at the end of the year or $600,000 during the year
US citizens, residents, and certain closely-held entities generally must file if they have an interest in foreign financial assets and the value of those assets exceeds the applicable reporting threshold. Specified foreign financial assets include assets that would be reported on an FBAR, but also include interests in a foreign entity, indebtedness issued by a foreign person, and foreign hedge or private equity funds. Failure to file Form 8938 also can result in a minimum $10,000 penalty.
The rules around foreign asset disclosure are complicated and sometimes unclear, but the penalties for failing to disclose are significant. Please mention ALL foreign assets to your tax advisor annually. Ongoing attention and diligence are required to minimize penalty risk.