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) if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year.
A “foreign financial account” is a financial account located outside the U.S. An account maintained with a branch of a U.S. bank that is physically located outside of the U.S. is a foreign financial account. A financial account includes a securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution. A financial account also includes a commodity futures or options account, an insurance policy or annuity policy with a cash value, and shares in a mutual fund or similar pooled fund. In addition, 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 calendar year for which it applies. Thus, FBARs for the 2011 calendar year must be filed on or before June 30, 2012.
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.
In addition and new for 2011, is a requirement for any individual who, during the tax year, holds any interest in a “specified foreign financial asset” to complete and attach Form 8938 to his or her income tax return if a reporting threshold is met.
The reporting threshold varies depending on whether the individual lives in the U.S. and files a joint return with his or her spouse. For example, someone who is not married and doesn’t live abroad will need to file Form 8938 for 2011 if the total value of his or her specified foreign financial assets was more than $50,000 as of December 31, 2011, or more than $75,000 at any time during 2011. For married taxpayers filing a joint return and living in the U.S., the threshold amounts are doubled, $100,000 or $150,000, respectively. The thresholds also are higher for taxpayers residing abroad.
For purposes of the reporting requirement for individuals with foreign assets a “specified foreign financial asset” is:
1. Any “financial account” maintained by a “foreign financial institution” or
2. Any of the following assets which are not held in an account maintained by a “financial institution”:
a. Any stock or security issued by a person other than a U.S. person,
b. Any financial instrument or contract held for investment that has an issuer or counterparty that is other than a U.S. person, and
c. Any interest in a “foreign entity”.
What is interesting is any interest in a “foreign entity” is subject to reporting. Therefore, one could imply, that if you own a business or real estate in a foreign country through a foreign entity, it needs to be reported.
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.
To the extent the IRS determines that the individual has an interest in one or more foreign financial assets but he or she doesn't provide enough information to enable the IRS to determine the aggregate value of those assets, the aggregate value of those assets will be presumed to have exceeded $50,000 (or other applicable reporting threshold amount) for purposes of assessing the penalty.
No penalty will be imposed if the failure to file the 8938 is due to reasonable cause and not due to willful neglect. The fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the required information isn't reasonable cause.
In addition, if it is shown that the individual failed to report the income from the foreign financial account on his or her income tax return, a 40% accuracy-related penalty is imposed for underpayment of tax that is attributable to an undisclosed foreign financial asset.
Furthermore, if you have received a large gift or bequests during the tax year from “non-U.S. persons” you also have a reporting requirement.
If the value of aggregate foreign gifts that you receive during any tax year exceeds a threshold amount, you must report each foreign gift to the IRS. A foreign gift is any amount you receive from a non-U.S. person which you treat as a gift or bequest. A non-U.S. person is any person other than a citizen or resident of the U.S. or a U.S. partnership or corporation. The term non-U.S. person also includes a foreign estate. Foreign gifts don't include qualified tuition or medical payments made on behalf of the recipient, or gifts which are otherwise properly disclosed on a return under the separate requirements applicable to amounts received from foreign trusts.
For purposes of determining whether the receipt of a gift from a foreign person is reportable, different reporting thresholds are applied for gifts received from nonresident alien individuals, and foreign estates, and for gifts from foreign partnerships, and foreign corporations.
So, a U.S. person is required to report the receipt of gifts from a nonresident alien or foreign estate only if the total amount of gifts from that nonresident alien or foreign estate is more than $100,000 during the tax year. Once the $100,000 threshold has been met, the one who receives the gift must separately identify each gift which is more than $5,000, but doesn't have to identify the donor.
A U.S. person must report the receipt of purported gifts from foreign corporations and foreign partnerships if the total amount of purported gifts from all such entities during the tax year is more than $14,723 for tax years beginning in 2012 and $14,375 for tax years beginning in 2011. Once the threshold has been met, the gift recipient must separately identify all purported gifts from a foreign corporation or foreign partnership, and provide the name of the donor.
If you fall within these reporting rules, you have to file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. The form is due on the date that your income tax return is due, including extensions. The form must be sent to the IRS at the address shown on the IRS website (irs.gov).
Where appropriate, I may be able to recommend planning approaches which may allow you to avoid the reporting requirements. For example, if you are expecting a gift of $120,000 from a nonresident alien individual or foreign estate, it may be possible to arrange for the gift to be paid over two years, so that in neither year does the gift exceed $100,000. If the split gift is the only foreign gift you receive each year, you will avoid the reporting requirement. Alternatively, if we can arrange for part of the gift to be made in the form of qualified tuition or medical payments, the rest of the gift may be reduced enough to avoid the reporting requirement.
The penalty for not reporting a foreign gift that must be reported is 5% of the amount of the gift for each month the failure to report continues, up to a maximum of 25%. The penalty will be excused if reasonable cause for the failure to report can be established.
Finally the gift that you receive is not income to you. There is no federal or state tax liability associated with it. Therefore, you should report it.
The above technical reference is provided as a courtesy to the reader by David Silkman, CPA, Silkman & Associates Accountancy Corporation and SilkRoad Realty, Inc. The information is technical in nature, may not include all the details on a particular subject and may require review of the reader’s circumstances by a professional. You should consult with your tax advisor.
David S. Silkman is a CPA, has a Masters in Taxation (MST) and is a licensed real estate broker. He specializes in real estate tax laws and accounting. If you have any questions, please do not hesitate to call him at 310.479.7020 x301, email him firstname.lastname@example.org or visit www.saacpa.com or www.SilkRoadRealtyInc.com. Thank you.