Penalties for not reporting foreign assets are steep. Are you at risk?

April 4, 2018|Lonnie Hampton, Jenny Morris

There’s a long list of foreign assets that need to be reported, and you could find yourself facing significant penalties if you don’t comply. The scariest part is that many taxpayers don’t even realize they have foreign assets.

Do you own or have authority over a foreign financial account? Are you certain? Many taxpayers may be in danger of violating foreign reporting rules and not even realize it, including corporate officers, college professors and military personnel.

Foreign reporting requirements are not to be taken lightly. Failure to file the proper forms or complete them accurately could find you facing significant civic and criminal penalties.

Commonly held foreign assets

Take note of this list, which includes common foreign assets you may have missed. You’ll want to let your Schenck tax advisor know if any of the following apply to you:

  • Ownership of any foreign financial assets, such as stocks and bonds issued by foreign entities, bank accounts (including deposit, custodial and savings accounts) with foreign financial institutions, foreign mutual funds, or interests in foreign partnerships or trusts. Generally if you hold these assets through an account with a U.S. branch of a financial institution, you do not need to report these items. It’s those assets held directly by you in a foreign financial institution or in a foreign branch of a U.S. financial institution that need to be reported.
  • A financial interest in, and/or signature authority (or other authority) over a bank account, securities account or other financial asset located in a foreign country, including employer-owned foreign accounts or assets.
  • Status as grantor or transferor for a foreign trust.
  • Beneficiary of a foreign trust or estate.
  • Ownership of more than 50% of a U.S. entity that owns foreign financial assets.
  • An interest in foreign-issued life insurance or a foreign-issued annuity contract with cash surrender value.
  • An interest in foreign pension or retirement plan.
  • An interest in a foreign partnership, including foreign hedge funds and private equity funds.
  • Foreign deferred compensation arrangements, whether vested or uninvested, including stock options or restricted stock units of a foreign entity.
  • Ownership of a foreign disregarded entity that owns foreign financial assets.

Reporting requirements

FinCen Form 114, Report of Foreign Bank and Financial Accounts (FBAR)

Your foreign financial assets must be reported if their combined total is $10,000 or more in U.S. dollars during the calendar year, even if each individual asset or account is less than $10,000.

Historically, FinCEN 114 was due June 30 of the following year, with no possible extension. However, beginning with the 2016 form, FinCEN 114 is due April 15 of the following year, with automatic extension to October 15. This form must be filed separately from your federal return and is filed electronically with the U.S. Treasury Department. If you meet the FinCEN 114 reporting requirements, you must file the form even if you are not required to file a federal return with the IRS.

If you violate this filing requirement you could face civil and criminal penalties up to $10,000 per violation for nonwillfull violations that are not due to a reasonable cause. Willfull violations may be the greater of $100,000 or 50% of the balance in the account at the time of the violation, for each violation.

Form 8938, Statement of Specified Foreign Financial Assets

This reporting requirement was introduced in 2011 under the Hiring Incentives to Restore Employment Act (HIRE Act). Form 8938 reporting must be completed in addition to other filing requirements, such as FinCEN 114. It is due with your federal tax return, such as Form 1040. You must report foreign assets if they exceed the reporting threshold at any time during the year, and these thresholds vary depending on your tax filing status and other factors. Certain domestic entities must also file Form 8938.

Penalties up to $10,000 can be applied for failure to disclose and an additional $10,000 for each 30-day period of non-filing after IRS notice of a failure to disclose (after an initial 90-day waiting period), for a total potential penalty of $60,000.

The IRS publishes a great chart outlining Form 8938 and FinCEN Form 114 requirements along with the assets that are reportable. Depending on your unique situation, you may have additional reporting requirements.

Please contact your account director to discuss how U.S. reporting requirements may apply to your situation or contact Schenck’s International Tax team at 800-236-2246 to find out how we can help.

Lonnie Hampton, CPA, shareholder, leads Schenck’s International Tax team and assists clients with international tax issues. He also provides advanced tax research, consulting, and tax planning for closely held corporations and individuals. In addition to corporate, individual and partnership tax return compliance, Lonnie assists manufacturing clients with R&D tax credit studies and represents taxpayers in IRS examinations.

Jenny Morris, CPA, MST, is a senior manager and member of Schenck’s International Tax team. She has nearly 25 years of international tax research, planning and compliance experience, and is skilled in defending international and domestic audits with tax authorities. Jenny advises clients on global entity structuring and foreign tax credit maximization, and is skilled in provision calculation and review, transfer pricing studies and documentation, and FIN48 analysis preparation and review for foreign taxes.