Do you have finances in offshore bank accounts? Do you have an earned income that stems from companies based overseas – and are those funds paid to you in the form of U.S. dollars? If you answered yes to both of these questions, then you need to be concerned about FBAR and offshore disclosure laws. The United States government, through the IRS, of course, has been closely monitoring and keeping an active eye on people and companies alike that earn monies overseas or have funds in foreign accounts. If you fail to disclose this information on your tax forms or don’t pay any require taxes or penalties on them, then you could find yourself swimming in a sea of trouble. Want to know more? Let’s go over these laws in depth to clear up any mysteries or misconceptions regarding your tax reporting.
What Is FBAR?
FBAR stands for Report of Foreign Bank and Financial Accounts. The law requires that you disclose all accounts, such as brokerage accounts, bank accounts, and even mutual funds, that are held in foreign banks. Any bank that isn’t located on American soil – including Canada – is considered foreign. The reason for this law is the fact that some people try to hide funds in these types of accounts in order to avoid paying taxes on them.
Did you know this law isn’t limited to just individuals or large businesses? Everyone and every company, from married couples with foreign assets to limited liability companies, partnerships, trusts, estates, and more must include this information on their yearly or quarterly U.S. tax forms. This reporting must be extremely accurate, lest you end up getting penalized by the IRS and having to pay a hefty chunk of change in penalties and fines.
What Doesn’t Need to be Reported Through FBAR?
With that said, some things are exempt from FBAR reporting. For example, correspondent and Nostro accounts, which contain money held for an organization by another organization in a bank on foreign soil, isn’t required to be reported on the FBAR form. You may have to pay taxes on it in another way, but not through the FBAR and offshore disclosure regulations.
Other exemptions include funds that are owned by a government entity, as well as money owned by an international financial institution. This makes plenty of sense, because both of those organizations and institutions are often exempt from having to pay taxes on these funds. Also, if the money is in a banking facility that’s maintained by the U.S. military, such as those operated for members of the Army, Navy, Air Force, or Marines, then you don’t need to disclose them using the FBAR form.
Some retirement plans are also exempt from FBAR regulations. Examples of these include those in an IRA (individual retirement account) owned by the filer or those that the filer is considered to be a beneficiary on. In addition, if you’re a beneficiary or participant in any kind of retirement plan that has invested those funds overseas, then you don’t need to file either. This makes plenty of sense, because often, the individual participant simply chooses which mutual funds to place their IRA or 401(k) money in and has little control over where the main institution holding those funds decides to invest. In this case, they may not even know that the funds are held overseas.
Finally, if you are the beneficiary of a trust that has invested money overseas or placed it in a foreign bank account and the person or organization in charge of administering the trust has already filed an FBAR report on it, then you don’t need to include it in your individual filing.
All of these regulations and exemptions are fully described in the United States’ IRS legal code. While newer versions continuously emerge, these laws actually date back several decades.
The History of IRS Offshore Disclosure Laws
In order to fully understand FBAR and offshore disclosure laws, we need to look back to where it all began. Back in 1997, the U.S. government and the government of Switzerland, which for years was known for its lack of disclosure about what people held in their bank accounts in that country, entered into an agreement. The two began sharing information about those Swiss bank accounts for the purpose of uncovering, identifying, and pursuing people and entities who deposited money in them to avoid paying taxes on these investments. Ill-gotten gains and other funds also turned up in those accounts.
Several years later, in 2003, a set of new guidelines went into place. These laws further defined what the U.S. meant by “tax fraud” because the Swiss officials, up until that point, had their own definition that didn’t quite mesh with what the U.S. deemed as a violation. Also as a part of those laws, the Union Bank of Switzerland required that all U.S. citizens agree to enter a disclosure agreement between the bank and the IRS, or else the bank would begin to hold some of their funds.
Over the years, these regulations have been changed and refined several times, until reaching the most recent 2018 version. The new voluntary disclosure guidelines are in place and must be followed by companies and individuals, except for those who fall under the safety umbrella of an exemption.
What You Need to Know About Offshore Disclosure
Offshore disclosure can be tricky to fully understand. At the outset, it seems simple, as you just need to fill out the forms and include information about the money you have in these foreign accounts. However, there are a number of exemptions, some of which are covered under the FBAR regulations and others under the 2018 Combined Voluntary Disclosure Program.
Since it’s crucial to follow these laws to the letter, lest you get hit with non-compliance penalties (more on those in the following section), you’ll need the help of an expert tax professional. Sometimes, something as simple as leaving off a single digit or not placing an account under the correct code can be enough to trigger a non-compliance audit.
Remember, these laws are designed to catch people who are trying to hide foreign funds. Clearly, not everyone who has money in an offshore account is actively trying to do this – some people simply have funds there for a myriad of other reasons. Because of this, there’s no need to feel guilty or fraudulent when telling your tax preparer about the funds. (And if that person or company is your regular accountant, they more than likely already know about the foreign held money anyway.) Simply put, the more information you provide at tax time, the better off you’ll be.
What Are the Penalties for Non-Compliance?
No matter where your funds are held – whether the Union Bank of Switzerland or another bank owned, operated, and located in another country – it’s up to you to disclose those funds on your tax forms. Otherwise, you run the risk of being fined, having your account assets frozen, or facing jail time, depending on how long the nondisclosure has continued for and the amounts involved. In some cases, you may simply trigger a non-compliance audit, while in others, the IRS will dictate a repayment schedule to ensure that you pay all required back taxes, penalties, and fees on those non-compliant accounts.
FBAR and offshore disclosure laws coupled with non-compliance penalties are not to be taken lightly. In order to protect your offshore assets and ensure that all your tax filings are complete and in full compliance – especially foreign accounts – you should seek the guidance of an experienced tax professional.
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