If you have had more than $10,000 in a foreign financial account for even one minute in a given year, you are required to file Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts) with the IRS. Failure to do so can lead to fines in excess of $10,000 per year and possible jail time, and not knowing you had to file is no excuse.
“It’s not only the accounts you own, you also have filing obligations if you have signature authority over a foreign account — if you have authority to write checks on the account, move money from the account and use the account — even if you have no ownership interest,” says Henry J. Grzes, CPA, MS, an associate director in the tax department and the head of the international tax group at SS&G Financial Services, Inc.
Smart Business spoke with Grzes regarding how to make sure you are meeting your filing requirements and what to do if you realize you needed to file in past years and did not.
What triggers the need to file these forms?
Anyone who has more than $10,000 in the aggregate in an account(s) in a foreign country, or who has control over an account in that amount, is required to file. The need to file is triggered when the $10,000 limit, at the rate of exchange for that particular day, is exceeded at any point during the calendar year.
You must file if you have direct ownership of that account or if you have signature authority over an account and the balance in that account exceeds $10,000 at any point during the year. If you have the authority to control the transfer of funds in that account, even if the company you work for owns it, or if you have controlling interest in a foreign company that has a foreign account, you have a filing obligation.
If a relative living in another country bequeaths you money and the money goes into an account in your name, even if that account is open for only one day, you are required to file. You also must file if you are a U.S. Permanent Resident (green card holder) but still have accounts in another country or are the U.S. beneficiary of a foreign trust.
The rules apply not only to U.S. citizens and Permanent Residents, but also to U.S. corporations, U.S. partnerships and U.S. trusts.
How widespread is noncompliance?
Voluntary compliance for individuals has historically been low. Some people are not complying because there has not been much in the way of guarantees for those who were previously unaware of the filing requirement and then became aware of their obligation.
There are many people, especially in the area of signature authority, who just do not know they have a filing requirement. The IRS is beginning to focus its resources on international compliance, and the U.S. government and the IRS are going to try to tax as much income as possible that is earned in investments located offshore and by companies doing business globally. They are trying to accelerate the U.S. taxation of this income.
Now that the IRS amnesty period for filing has ended, what steps should you take if you have failed to report accounts or just recently become aware of your filing obligations?
Even if you did not get amnesty, you need to come clean. If you come forward voluntarily, the IRS in the past had indicated that it was generally going to be reasonable. If you can clearly demonstrate that you had no knowledge of your filing obligation and you have reported all of the income from these foreign accounts on your prior years’ tax returns, you have a better chance that the IRS will not throw the book at you. However, now that this much-publicized amnesty period has ended, it is unclear if this policy will remain in effect.
Once you determine that you have an interest in a foreign financial account, contact a competent international tax professional to figure out the next step. You should also consider engaging competent legal counsel, as the failure to file this report can subject the taxpayer to both civil and criminal penalties.
If you do not come forward, the position of the IRS is, ‘We’ve advertised this amnesty chance, and if you didn’t take advantage of it, we’re going to come after you and we will penalize you to the fullest extent possible.’ No one knows for sure what will happen now that the amnesty period has ended. Some feel that the IRS will find a high-profile U.S. citizen, who has enough money to make an example of as someone who didn’t come forward, and attempt to charge them with criminal offenses, which if convicted, could result in jail time for that individual.
For green card holders, the IRS may obtain sanctions against that individual, which would result in having that person’s U.S. Permanent Resident status revoked. The consequences may include deportation from the U.S. The attitude of the IRS most likely will be that ‘If you don’t come clean, this is what’s going to happen to you. If we find you first, you’re going to be held accountable.’
Why is the government stepping up its efforts to find money in foreign accounts?
The government is looking for illegal accounts, money laundering, and other accounts along those lines. Enforcement has been intensified as a result of Sept. 11. With the ease at which funds can be electronically transferred, the government is watching more closely the funds controlled by U.S. persons.
In addition to enhanced enforcement of these rules, the U.S. government is negotiating income tax treaties with other countries that include information-sharing clauses, which guarantee that, under the right circumstances, the U.S. government can call on the government of that other country to request information about U.S. taxpayer accounts.
If you are unsure if you should be filing Form TD F 90-22.1, contact a knowledgeable international tax professional to help you make the determination.
Henry J. Grzes, CPA, MS, is an associate director in the tax department and the head of the international tax group at SS&G Financial Services, Inc. He is also a member of the AICPA Foreign Bank Account Report (FBAR) Task Force. Reach him at [email protected] or (800) 869-1835.
