What Are the FBAR Reporting Requirements for U.S. Citizens Living Overseas?
If you are an American citizen whose work, family, or lifestyle have sent you to live overseas, you may wonder whether you are still required to file U.S. tax returns or disclose your foreign assets. A recent complaint filed by the IRS in the United States District Court for the District of Columbia demonstrates the FBAR reporting requirements for U.S. citizens living overseas, and provides a cautionary tale against reporting some, but not all of your assets and interest.
U.S. Citizen Lives Overseas, Banks Internationally and Takes a Chance
Paul Sochaczewski was born in the United States, making him a U.S. citizen. In 1981, he moved to Switzerland. As far as the IRS knows, he still lives there. According to the government’s complaint, Mr. Sochaczewski has had a number of bank and securities accounts over the years at:
- UBS in Switzerland in 2005 - 2012
- Rahn & Bodmer Co. in Switzerland in 2005 - 2012
- HSBC in Hong Kong in 2007 - 2012
- Siam Commercial Bank in Thailand in 2007 - 2012
Together, these accounts totalled more than $10,000 USD each year. Over the years, Mr. Sochaczewski hired a tax preparer to help him file his U.S. tax returns. Since at least tax year 2005, he had been submitting Form 1040 including Schedule B, which asks about foreign financial accounts. Each year, he had also filed Reports of Foreign Bank and Financial Accounts (FBARs), now FinCEN Form 114, reporting his account at UBS.
However, while Sochaczewski disclosed that he had a UBS account in Switzerland, the IRS says he failed to report the accounts he held at Rahn & Bodmer Co, and in Hong Kong and Thailand on Schedule B of his tax returns, or on his FBARs. His tax returns also didn’t report the interest he earned on those accounts.
The FBAR Reporting Requirements for U.S. Citizens Living Overseas
U.S. citizens are not excused from filing tax returns and other mandatory disclosures simply because they have moved out of the country. In fact, U.S. citizens living overseas are more likely to hold accounts that must be reported than their domestic counterparts. That is because keeping your money close at hand is likely easier than investing it in U.S. financial institutions.
U.S. citizens and other taxpayers are required to disclose all their income on their U.S. tax returns, including any interest paid by foreign financial institutions. In addition, any time your international financial holdings add up to at least $10,000, you must file a separate FinCEN 114 form at the same time as your 1040 that discloses each account above that threshold.
Failure to file FBARs on time can result in substantial penalties, as Mr. Sochaczewski is discovering. If your failure to file was unwillful (and not reckless), the IRS can impose a penalty of up to $10,000 per account per year, with a maximum penalty of 50% of the highest aggregate balance for all unreported accounts.
However, as Mr. Sochaczewski’s case demonstrates, the IRS is quick to claim that non-disclosure was willful, and to impose the higher penalty that goes with that designation: up to 50% of the highest aggregate balance of all unreported financial accounts each year.
Partial FBAR Disclosures Add Up to $167,000 in Willful FBAR Penalties
The complaint the IRS filed in district court included penalties for each account in each year that account was not included in Sochaczewski’s FBAR filing. The list included fines as small as $117 and as large as $30,120. All together, the IRS assessed a total of $167,310 in civil penalties, plus interest.
Mr. Sochaczewski’s legal trouble shows just how important it is to disclose all your assets every year. By cutting corners and only making partial FBAR disclosures, Sochaczewski is facing a tough battle against a government looking to label his incomplete information a willful violation of federal tax law.
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.