Foreign Bank Account DISCLOSURE

Setting up an international account may be easy, but managing one is costly.  There are many things that must come into play before this happens.  The tax laws must be monitored, the account must be maintained and the law must be followed. On the bright side, banking offshore actually saves tax dollars.

If you are a U.S. citizen or resident for tax purposes, you are required to disclose to the IRS details of your offshore account if the amount in offshore accounts exceeds $10,000.  The basic key to remember is that if you bank offshore, complying with your native country’s laws is up to you.  It’s very important to be informed of how financial services institutions are regulated, as well as what the consumer protection schemes are in place for anyone.

Here’s how to go about it.

1.  Report your worldwide income.  On your tax return, you must report your income and check “yes” (on Schedule B) if you have interest in a foreign bank or financial account. This means everything: interest, foreign earnings, wages, dividends and other income.  Even if the income is being taxed elsewhere, you still have to report it to the IRS.
2. Tax Return Disclosure is not enough.  Just filing alone is not enough.  All U.S. persons with foreign bank accounts must also file a Treasury Department Form- Report of Foreign Bank and Financial Accounts, commonly called an FBAR, annually.  The FBAR is due each June 30 for the previous year.  You must file one if the aggregate value of your foreign financial accounts exceeds $10,000 at any time during the year.  Even if you have two small accounts in separate countries, if they exceed that amount, you need to file an FBAR.  However, if your foreign bank account balances total less than $10,000 U.S. at all times during the year, you do not need to check the box on your tax return or file an FBAR; but you still have to report any account earnings on your tax return.
3. Beware of Big Tax Penalties.  If you don’t obey one or both sets of obligations, the penalties can be harsh.  Since you sign tax returns under penalties of perjury, if you fail to report your worldwide income—or even fail to check the box disclosing that you have a foreign account, you can be penalized for tax evasion and fraud.  For such a criminal act, the statute of limitations is six years.  Keep in mind; this never expires on civil tax fraud, so the IRS may pursue you as far as 10 or 20 years later for back taxes, penalties and interest.
4. FBAR Penalties are Even Larger. Penalties for failure to file an FBAR are even worse.  This can carry a civil penalty of $10,000 for each non-willful violation.  On the contrary, if your violation is found to be willful, the penalty is the greater of $100,000 or 50% of the amount in the account for each violation… as well as each year you didn’t file as a separate violation.
5. More Penalties… Jail Time.  While failing to file a tax return is a misdemeanor, filing a false tax return is a felony.  If you are convicted of tax evasion, you can face a prison term of up to five years as well as a fine of up to $250,000. A false return can mean up to three years in prison and a fine of up to $250,000.  If you fail to file a return altogether, you can face up to a year of prison and a fine of up to $100,000.  Failure to file an FBAR can be harsh as well, and the penalties can reach $500,000 along with a potential prison term of up to ten years.  As you can see, the IRS takes this VERY seriously.
6.  Voluntary Disclosure as an Option.  A “voluntary disclosure” is a chance to admit your failures to the IRS and try to make things right.  This must be timely, truthful and complete.  You have to cooperate with the IRS to correctly define your tax liability, make arrangements to pay the tax, penalties and interest with the IRS.  Generally, the government will not prosecute you if you come forward voluntarily before you are under investigation.  See more about this and the Offshore Voluntary Disclosure Program (OVDP) here.
7. Another Option: Quiet Disclosure.  A “quiet” disclosure includes a correction of past problems without drawing attention to your account, and without going to the IRS Criminal Investigation Division.  If you reported and paid all taxes on your income but did not file FBARS, it would be a good idea to attach a letter explaining why they were late.

Remember, you are entitled to have money and investments anywhere in the world you want; as long as you disclose the accounts.  On the contrary, closing your foreign accounts does not relieve you of the obligation to file FBARS and tax returns.

It’s imperative to get professional advice and try and get your situation resolved.  Contact the experienced tax attorneys of Dallo Law Group to help you today!