Foreign Assets and Financial Accounts

Anyone who has investment out of United States may pretty much pay attention to his or her annual tax return. Tax payers in United States are responsible to report their foreign assets and financial accounts to the Treasury Department and IRS, regarding the regulation known as the Bank Secrecy Act. Under this particular act, people must report certain foreign financial accounts, such as bank accounts, brokerage accounts and mutual funds to the Treasury Department and keep certain records of those accounts. Form 114 must also be filed to report foreign bank and financial accounts if anyone meets the above conditions. Otherwise, certain taxpayers holding specified foreign financial assets must report information about those assets on Form 8938, which must be attached to the annual income tax return. However, the Form 8938 filing requirement does not replace a taxpayer’s obligation to file FinCEN Form 114. This blog will give a detailed introduction on the requirements for filing form 114 and 8938.

To begin with, domestic individuals, corporations, partnerships, and trusts that are considered formed or availed of for the purpose of holding, directly or indirectly, specified foreign financial assets (specified domestic entities) must file Form 8938 if the total value of those assets exceeds $50,000 on the last day of the tax year or $75,000 at any time during the tax year of 2018. The specified individuals living outside the US must file this form are those whose possession of the total value of those assets exceeds $200,000 on the last day of the tax year or $300,000 at any time during the tax year of 2018. The reporting threshold may change in other tax years. Form 8938 must be filed on an annual basis attaching to income tax return and due on the date of that return. If the taxpayer fails to file form 8938, a potential maximum penalty of $60,000 may generated.

Unlike Form 8938, the FBAR (FinCEN Form 114) is not filed with the IRS. It must be filed directly with the office of Financial Crimes Enforcement Network, a bureau of the Department of the Treasury, which is separate from the IRS. U.S. citizens, resident aliens, trusts, estates, and domestic entities that have an interest in foreign financial accounts and an aggregate value of financial accounts exceeds $10,000 at any time during the calendar year must file Form 114. This is a cumulative balance, meaning if you have 2 accounts with a combined account balance greater than $10,000 at any one time, both accounts would have to be reported. Form 114 must be filed before April 15. A person who is required to file an FBAR and fails to properly file may be subject to a civil penalty not to exceed $10,000 per violation. If there is reasonable cause for the failure and the balance in the account is properly reported, no penalty will be imposed. A person who willfully fails to report an account or account identifying information may be subject to a civil monetary penalty equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation.