Taxpayer Beware: New FBAR Filing Deadline for 2016
Changes to the IRS foreign financial account filing requirements, especially the FBAR filing deadline for 2016, could catch US taxpayers off guard next month. Don't get caught unaware. Find out what you and your accountant need to know now, before April 18 rolls around.
2016 is the first tax year to reflect changes by the IRS in the offshore account reporting requirements. Even if you and your accountant have been filing Reports of Foreign Bank and Financial Accounts (FBARs) for years, changes in forms and in deadlines could cause you to become unintentionally non-compliant if you aren't careful.
Who Do the FBAR Filing Changes Affect?
The FBAR filing changes will affect anyone with an interest in financial accounts overseas that had a cumulative value of $10,000 or more at any time during the year. In particular, the Bank Secrecy Act requires U.S. taxpayers to file FBARs, including:
- U.S. Citizens
- Resident aliens
- Non-resident aliens with taxable interests in the U.S.
- Trusts, estates, and domestic entities
A financial interest includes:
- Financial accounts held at foreign financial institutions (either deposit or custodial accounts)
- Assets held in foreign branches of U.S. banks
- Foreign retirement accounts
- Foreign mutual funds
- Foreign trust accounts where the taxpayer is the grantor
- Life insurance or annuity contracts with cash value if they are issued by a foreign entity
- Accounts where the taxpayer has a signatory authority
- Accounts where the taxpayer has indirect ownership or a beneficial interest.
If you have recently inherited money in a foreign bank account or have been named a trustee, you could be subject to FBAR filing requirements and not know it.
FBAR FinCEN Report 114 Due on Tax Day
Anyone who falls within the FBAR filing requirements must report their foreign financial accounts to the Department of Treasury by filing a Financial Crimes Enforcement Network (FinCEN) 114 form. Until now, taxpayers with foreign accounts had until June 30 to provide the required information. That changed with the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015. Beginning with the 2016 tax year, the deadline to file the FBAR has moved up to April 15.
However, the law also allows for a six-month extension of the deadline. The IRS has indicated that anyone failing to file by April 15 will be granted an automatic extension to October 15. In addition, certain individuals with only a signatory authority may qualify for a filing deferral until April 15, 2018.
Federal Tax Return Forms
A timely FBAR filing isn't necessarily enough to satisfy your foreign financial account reporting requirements. Most U.S. taxpayers who are required to file FBARs must also file additional forms with their annual tax returns under the Foreign Account Tax Compliance Act (FATCA). Taxpayers who own foreign financial accounts often must complete Form 8938, a Statement of Specified Foreign Financial Assets. The reporting thresholds for this form are:
- Unmarried taxpayers: $50,000 in assets on the last day of the year or $75,000 at any time during the year (or $200,000 and $300,000 respectively for foreign residents).
- Married taxpayers (filing jointly): $100,000 in assets on the last day of the year or $150,000 at any time during the year (or $400,000 and $600,000 respectively for foreign residents).
Taxpayers who have interests in foreign trusts or received foreign gifts or inheritances exceeding threshold amounts will need to file Form 3520, an Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, with their federal tax returns. These forms are often required if the U.S. taxpayer:
- Owns any part of the foreign trust assets
- Is responsible for reporting a reportable event, such as a transfer of property out of a foreign trust
- Received distribution or certain loans from a foreign trust
- Received more than $100,000 in gifts or bequest from a nonresident alien or foreign estate (even relatives)
- Received more than $15,671 in gifts from foreign corporations or partnerships
Schedule B Filing Requirements
All U.S. taxpayers need to be very careful completing Schedule B, the Interest and Ordinary Dividends, on their federal tax returns. Schedule B, Part III, asks taxpayers:
"At any time during 2016, did you have a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country?"
“During 2016, did you receive a distribution from, or were you the grantor of, or transferor to, a foreign trust?”
A taxpayer with accounts that earn any more than minimal interest or dividends will have to include Schedule B with his or her personal tax return. That income must be reported on Schedule B even if the taxpayer does not receive a 1099 from the foreign financial institution.
This language is the only widely disseminated IRS document that puts taxpayers on notice that they may be required to report their foreign financial accounts. Taxpayers are presumed to know about these requirements and are held accountable if they fail to file those disclosures. If a taxpayer provides negative answers to Schedule B (or leaves the questions blank), it could be used against them later on by the IRS.
Schedule B and FBAR Willful Non-Compliance
A taxpayer’s negative answers to the questions in the foreign account section of Schedule B are a primary source of evidence that he or she willfully failed to file FBARs with the IRS. Both the FATCA and the BSA allow the IRS to impose penalties if taxpayers fail to report international income or assets. Under the FATCA, non-disclosure could cost $10,000 to $60,000. FBAR penalties can climb even higher if an IRS investigator determines that the violation was willful. If a taxpayer says he or she did not have a financial interest under Schedule B, Part III, as well as failing to file FBAR forms, that misrepresentation makes it more likely an IRS investigator will say the violation was willful and issue penalties up to $100,000 or 50% of the account balances.
Tax season is always stressful for U.S. taxpayers and their accountants. The recent changes to FBAR deadlines and filing requirements only make it more challenging. Contact an experienced tax attorney before April 15 to make sure you know how to avoid penalties later on.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding FBAR requirements or penalties, contact Joe Viola to schedule a consultation.