By Kenneth H. Bridges, CPA, PFS August 2014
There has for many years been a requirement that any US person with a financial interest in or signature or other authority over a foreign financial account file with the Treasury Department each year by June 30 a Form TD F 90-22.1, disclosing the details with respect to such accounts, if the aggregate balance of such accounts at any time during the prior calendar year exceeded $10,000. For filings this year, the TD F 90-22.1 was replaced with new Form FinCEN Report 114.
In addition to the FinCEN 114, you may also have to attach to your income tax return a Form 8938 (Statement of Specified Foreign Financial Assets) which somewhat overlaps with the FinCEN 114. The Form 8938 applies to any specified individual (basically U.S. citizens, residents, and some nonresidents) with foreign accounts (including financial instruments with non-U.S. counterparties and certain equity interests in non-U.S. companies) which exceed $50,000 on the last day of the tax year or $75,000 at any time during the year.
Until a few years ago, the only penalties for failure to file a Form TD F 90-22.1 were for a willful failure to file, and prosecution was rare. However, current law provides for a penalty of up to $10,000 in the case of a nonwillful failure to file, the civil penalty for a willful failure to file can be up to the greater of $100,000 or 50% of the account balance, and the IRS is aggressively pursuing unreported foreign accounts. The penalties apply on a per failure basis, such that the total penalty can be many times the amount in the account.
In 2009, in order to encourage taxpayers to come forward voluntarily, the IRS announced a settlement offer under an Offshore Voluntary Disclosure Program (OVDP). Under the original OVDP, those coming forward (and otherwise meeting the terms of the program) could avoid criminal prosecution by paying the back taxes due (with penalty and interest) on income from the foreign accounts plus a penalty equal to 20% of the highest balance in the accounts. The program was subsequently revised twice, increasing the penalty first to 25% of the highest account balances and then later to 27.5%.
In June of this year, the IRS announced a further modification to the OVDP whereby those with non-willful failures can pay a penalty of only 5% of the highest account balance (versus the previous 27.5%), while increasing the penalty to 50% if it becomes public knowledge prior to submission of a request that a financial institution where the taxpayer holds an account has come under investigation by the IRS or Department of Justice.
Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP an Atlanta-based CPA firm.
This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice. The article provides only a very general summary of complex rules. For advice on how these rules may apply to your specific situation, contact a professional tax advisor.