Unreported Offshore Accounts (Part 1)
The IRS has had an initiative to voluntarily disclose offshore accounts. There is an annual filing of Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts (FBAR) which is due each June 30. The voluntary reporting period is over and now failure to comply with the regulations are serious and enforcable.
If you have a foreign or offshore account or accounts with a value of more than $10,000, the account or accounts must be disclosed annually on an FBAR. In addition if you have signature authority on a business offshore account, the same reporting is required. There is also a check box on Form 1040 Schedule B that asks if you have financial interest or signature authority over an account located in a foreign country.
Types of offshore accounts:
- · Foreign bank accounts
- · Foreign brokerage accounts
- · Offshore mutual funds or pooled investments
- · Certain foreign trusts
- · Foreign life insurance or annuities if they have cash value
- · Foreign IRA’s
You might ask what if I fail to disclose the offshore accounts and do not file the FBAR. The IRS will impose some very harsh penalties.
Criminal penalties: if the IRS finds a willful failure to file an annual FBAR, it is a felony punishable by up to five years in prison and a fine of up to $250,000.
Civil penalties: if the IRS finds the violation was willful, the penalty is up to $100,000 or 50% of the highest account balance in each year there is a violation, whichever is the greater. Today with low interest rates, it is possible to have a $1 million account generating only a few thousand dollars a year in interest, yet the civil and criminal penalties for willful failure to file FBAR could exceed $500,000.
The prevention of these penalties is pretty simple. If you have a foreign account or signature authority on a foreign account, check the box on Form 1040 Schedule B and file Form FBAR. Also make sure your report on Schedule B the earnings from your foreign account. Your ShindelRock tax professional can assist you with the filings or answer any questions that you may have.
Watch for Part 2 which will discuss the new Form 8938 for 2011.