Disclosure of Foreign Financial Accounts
Posted on Feb 07, 2012
As has been widely reported in the press, a U.S. citizen or resident individual must file a Foreign Bank Account Report (FBAR) to disclose foreign bank and securities accounts. Most recently, the press reported that, although GOP candidate Mitt Romney disclosed his federal tax returns to the public, he did not disclose his FBARs.
Despite generating publicity, the U.S. government’s use of the FBAR requirement to enforce tax laws was weakened by the fact that FBAR enforcement relied on decisions made by the U.S. Department of Justice. The IRS could not itself enforce FBAR requirements to increase tax compliance.
To cure this perceived defect, the U.S. Congress passed the HIRE Act, which was signed by President Obama in March, 2010. With effect for 2011 and later tax years, individual taxpayers with an interest in a “specified foreign financial asset” are required to report such interest on IRS Form 8938 (filed with their annual tax return) if the aggregate value of such assets is greater than $50,000. The civil penalty for failure to supply this information is $10,000, which can be increased to a maximum of $50,000 after IRS notice. Any understatement of federal income tax attributable to a reportable foreign financial asset that is not disclosed on the Form 8938 is 40% of the non-disclosed asset.
Although FBAR prosecutions by the U.S. Department of Justice obtained widespread press attention, the actual number of individuals successfully prosecuted has been relatively small compared to projections of actual non-compliance. The IRS is unlikely to be as delicate in its allocation of compliance resources. U.S. taxpayers violating the new HIRE Act requirements are likely to find that they will be receiving an automatic assessment equal to 10% when they fail to disclose a foreign financial asset, along with an automatic 40% penalty for the income deemed to have been avoided on their tax return.
In our experience few taxpayers in Vermont have the wealth of Mr. Romney, but Vermonters with foreign bank accounts and assets are not at all that rare. Compliance with the new Form 8938 requirements during the 2012 filing season should not be very onerous, but the cost of non-compliance could be extraordinarily high. Vermont taxpayers with foreign assets should consult their advisors to discuss what types of assets are covered by this new filing requirement and the deadlines for compliance.