Each U.S. person who has a financial interest in or signature or other authority over foreign bank accounts, securities accounts or other financial accounts must file a Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts or FBAR) for each calendar year during any part of which the aggregate value of the accounts exceeds $10,000. This is true even if the account has not earned any income during the year. For this purpose, a debit card account is a financial account, and a credit card account may be treated as a financial account under certain circumstances. The FBAR is due by June 30 following the year for which it applies.

The penalties for failure to file a FBAR are onerous. The civil penalties for a non-willful violation may not exceed $10,000 per violation. Civil penalties for a willful violation may not exceed the greater of $100,000 or 50% of the amount in the account at the time of the violation. The criminal penalty for willful violations is a fine of not more than $250,000, or imprisonment for not more than five years, or both.

A new disclosure Form 8938 is required for any individual who, for any tax year beginning after March 18, 2010, holds specified foreign financial assets with an aggregate value exceeding $50,000.

Specified foreign financial assets include financial accounts maintained by foreign financial institutions and other assets not held in accounts maintained by financial institutions, such as stock or securities issued by non-U.S. persons, financial instruments or contracts with issuers or counterparties that are non-U.S. persons, and interests in certain foreign entities. However, no disclosure is required for interests that are held in a custodial account with a U.S. financial institution.

The penalty for failing to report specified foreign financial assets for a tax year is $10,000. However, if this failure continues for more than 90 days after the day on which the IRS mails notice of the failure to the individual, additional penalties of $10,000 for each 30-day period (or fraction of the 30-day period) during which the failure continues after the expiration of the 90-day period, with a maximum penalty of $50,000.

On January 9, 2012 the IRS reopened the Offshore Voluntary Disclosure Program (OVDP). The program’s primary objective is to encourage those individuals with undisclosed offshore accounts to get current with their taxes. For the new program, the penalty framework requires individuals to pay a penalty of 27.5% of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25% in the 2011 program. Some taxpayers will be eligible for 5 or 12.5% penalties; these remain the same in the new program as in 2011. The provisions in this program are quite extensive and beyond the scope of this article.

Please contact us should you have any questions regarding your foreign reporting requirements.