We wish our readers a Happy New Year and hope you had an enjoyable holiday season. Of course, as soon as the calendar turns to a new year, our thoughts turn to filing annual tax returns.
One of the tax-related topics that generated a lot of interest in 2011 is foreign bank accounts and other overseas assets, especially here in California where so many people are first- or second-generation immigrants who still have family and financial connections to their homeland.
We featured this topic this past Saturday afternoon on our weekly radio broadcast on KDOW 1220 AM. As we mentioned on the show, we have written about this topic in previous posts and will probably discuss it further in the coming weeks, because there is so much to know about this important subject and it affects so many people in the local Bay area, especially in Silicon Valley.
During the last three years, the IRS has placed the collection of taxes on overseas assets on its priority agenda, along with collecting back-taxes, plus stiff penalties, if they determine you have committed a “willful violation” of tax reporting laws.
The IRS has also made many efforts to publicize the reporting requirements for offshore assets and it has implemented initiatives to make it easier to become compliant for any current or back taxes you may have owed. Therefore, should you be audited for non-compliance of reporting a foreign bank account or other overseas assets, it will be very difficult to prove you were unaware of your tax reporting obligations.
On the radio program, we covered some (not all) of the details and requirements for reporting the bank accounts or other property you own in another country on your 2011 tax returns:
- The U.S. Treasury Department requirement for taxpayers to disclose foreign assets valued at more than $10,000 at the end of the year is formally known as the Report of Foreign Bank and Financial Accounts (FBAR). The IRS is the collection agency responsible for ensuring taxpayer compliance with this law.
- You need to report eligible foreign assets if you are a U.S. citizen or you are a citizen of another country who resides in U.S. and you claim this country as your tax base. The form to use is TD F 90-22.1 (Here are FBAR Filing Requirements FAQs and FBAR Financial Accounts FAQs.)
- The deadline for filing an FBAR is June 30, 2012. No extensions to that deadline are available, even if you have received an extension for filing your regular tax return Form 1040.
- The civil penalty for non-compliance is $10,000 per incident. If the IRS proves you have committed a “willful violation” of not properly reporting foreign assets, you will be subject to criminal penalties.
- The U.S. Treasury Department is working closely with foreign banks to obtain the identity of all accounts owned by U.S. taxpayers. The banks are increasingly using sophisticated technology, such as face recognition software, to prevent depositors from hiding their identity from governments.
- If you decide to leave the U.S. and declare a different country as your tax base, to avoid paying U.S. taxes, you must follow an official exit procedure.
- The IRS reports that more than 90% of tax fraud attempts are caught and penalized, so compliance may be the less-expensive option.
- In addition to the cash balance in overseas bank accounts, foreign assets include brokerage accounts, CDs, bonds, and whole life insurance policies with a cash value over $10,000.
- A new filing requirement for 2011 is that if the value of your foreign assets is greater than $100,000 at the end of 2011, or if they exceeded $150,000 at any point during 2011, then you need to file Form 8938, Statement of Foreign Financial Assets.
- You may meet the “accidental requirements” for filing an FBAR if you find yourself in one of several situations, such as:
- You are an overseas student whose parents have set up a foreign trust fund from which you receive income.
- You have retired and moved to the U.S., to be near your children and grandchildren, but you still own retirement accounts or real estate in your homeland.
- You are one of many technology industry workers in Silicon Valley who still have oversea ties.
If you are from another country and still have family there, we recommend that you ask your parents, grandparents, and other close relatives, if perhaps at some point in the past they included your name on a joint family account or set up a trust or other assets in your name. We suspect you would prefer to discover this information yourself rather than by receiving a certified letter in the mail from the Internal Revenue Service.
The IRS is not really concerned with how your name became associated with a foreign asset, they only look at the facts and then pursue revenue to which they are legally entitled. They expect you, as a qualified U.S. taxpayer, to be aware of all of your domestic and foreign financial assets, to know the law, and to pay your taxes on time every year.
We will explore this topic again soon, because we have just scratched the surface of all of the aspects of this subject. And please remember that reading this or any other blog does not constitute real research on the subject. To fully understand your legal requirements regarding this subject, start by clicking some of the links above or this link to the IRS website, then consult a tax professional whose responsibility is to know the law and act accordingly on your behalf.
If you have any questions about reporting foreign assets or you would like to schedule a free consultation to discuss your situation regarding overseas assets for the tax year that just ended, please contact us.