Foreign Income, Offshore Voluntary Disclosure and FBAR

The IRS is far-reaching, and US citizens will need to report their foreign income if it exceeds a certain threshold. In many occasions, your taxes on foreign income can be reduced to zero, but you still need to report it to the IRS. Offshore bank accounts are frequently used to hide income and evade taxes in the US. Therefore, the IRS monitors feverishly how US money moves throughout the world. Failure to properly report your foreign income and financial accounts can lead to sizeable penalties. Daily, Montfort & Toups can help you understand your responsibilities as a taxpayer and help you navigate through the complex web of procedures surrounding foreign income and financial assets.

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FOREIGN INCOME – FORM 1040

If you receive income from foreign countries, and exceed a certain threshold, you will have to report it to the IRS. It doesn’t mean that you will necessarily pay taxes to the IRS. Depending on the circumstances, there are numerous exemptions and deductions available to reduce the taxes you pay in the US.

You have to report foreign income if:

  • You’re single, filing individually, under 65 years old, and earn over $12,000 per year from other countries
  • You file jointly with your partner and your collective income is over $24,000 per year from other counties

If you’re over 65, file separately from your spouse, or are a widow(er), there are special thresholds that apply to you.

To report your foreign income, you have to submit Form 1040 by April 15th for the previous year. In addition, there are a number of other tax reports you will have to complete and submit to the IRS.

FOREIGN BANK ACCOUNT REPORT – FBAR

The IRS is interested in the amount of money US citizen holds in foreign bank accounts. If you hold more than $10,000 foreign bank accounts, you will have to report it using the Foreign Bank Account Report (FBAR). If you have more than 1 account or own different financial assets, then the total sum is evaluated.

Even if you don’t own any money in foreign bank accounts, but have authority over such you will be required to submit an FBAR form. For example, if you manage work-related foreign bank account owned by your employer.

Other assets included in the Foreign Bank Account Report:

  • Foreign bank account balances, where the total sum exceeds $10,000
  • Financial account held at a foreign branch of a US bank
  • Stock or securities held in an account at a financial institution outside the US
  • Foreign mutual funds
  • Life insurance or annuity contract issued by a foreign entity

FBAR is merely a statement of your finances and it doesn’t necessarily mean you owe any taxes. But you might.

To submit an FBAR, taxpayers are must to file an electronic FiCen Form 114 by April 15th each year with a possible extension up to October 15th. The information will be submitted to the Department of the Treasury – not the IRS.

FOREIGN ACCOUNT TAX COMPLIANCE ACT – FATCA

If you own sizeable financial assets in foreign bank accounts, there are additional duties to report them to the government. Under the Foreign Account Tax Compliance Act (FATCA), you must also complete and submit Form 8938. This is in addition to Form 1040 and/or FBAR.

The thresholds are different for citizens who live in the US and those living abroad.

You must submit a FATCA form if your foreign financial assets are:

  • Valued at $50,000 or more at the end of the tax year
  • Have exceeded $75,000 at any given point during the year
  • AND you live in the USA and file individually
  • Valued at $200,000 or more at the end of the tax year
  • Have exceeded $300,000 at any given point during the year
  • AND you live in a foreign country and file individually

For married couples filing jointly, the thresholds double.

Since 2015, foreign banks also submit data about your financial assets to the IRS. So, the agency is much more likely to catch you cheating than with FBAR filings.

CONSEQUENCES FOR NOT FILING YOUR FBAR

An FBAR is a serious responsibility. Failure to submit the report will result in a 5 or 6-figure fine, depending on the circumstances.

  • If you’ve failed to submit an FBAR simply because you were ignorant of your responsibilities and you had no intention to defraud the government, you will be charged with a fine of $10,000.
  • If the IRS can prove you’ve willfully avoided filing your FBAR, then you will be charged with the larger of $100,000 or 50% of the value of the foreign bank accounts that were not reported.

The agency provides a chance for individuals and businesses to get caught up with their due FBAR submissions. The Streamlined Filing Procedure is available to residents and expats of the US and gives them an opportunity to file all their late paperwork without any consequences. For residents of the US, a fine of 5% over foreign financial assets is applied.

If the IRS catches you first, you lose the ability to use the Streamlined Filing Procedure and will face the full consequences of your actions.

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