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| Let’s Talk Taxes – Foreign Bank Accounts Reporting |
Asha Dixit
11/05/2012
“There are responsibilities that go along with owning such foreign bank and financial accounts. Foreign account owners must remember that they may have to report their accounts to the government, even if the accounts do not generate any taxable income.†IRS Commissioner Doug Schulman (IR-2008-79, June 17, 2008)
An obscure form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts, or FBAR), which many US taxpayers have never heard of, has recently begun to steal the headlines. Born with the Bank Secrecy Act (BSA) of 1970, the Foreign Bank Accounts Reporting affects many US persons with foreign bank accounts. As the name clearly implies, this is only a reporting form.
It’s important to understand who is subject to the requirements of this filing. A US person with a financial interest in, or signature authority over, foreign financial accounts must file an FBAR if the aggregate value of foreign financial accounts exceeds $10,000 at any time during the calendar year.
For 2012, R has $15,000 in a bank account in Switzerland. R is required to file the FBAR form for 2012.
Individuals with multiple accounts should take into consideration the aggregate account balances.
In 2012, S has 3 foreign bank accounts in Austria with $3,000, $2,000 and $7,000 balances, respectively. Even though each account has an individual balance of less than $10,000 for the year, S has an FBAR filing obligation for 2012 since the aggregate value of the accounts exceeds $10,000.
Foreign accounts should be reported on the FBAR. Taxable income from such accounts, along with other foreign income, should be reported on the individual’s income tax return for the year.
If R earned $750 of interest income from the Swiss bank account, he must include this income along with any other interest income on Schedule B of Form 1040. If foreign taxes were withheld, then he should take a foreign tax credit on his tax return.
Many US persons subject to the FBAR reporting obligation do not take this requirement seriously. Numerous criminal cases have been successfully brought to trial by the IRS in the recent years drawing the attention of the US public to this previously little-known and now much-feared form. Foreign accounts should be carefully scrutinized for transactions that may subject the individual to FBAR.
N has a foreign bank account with a $100 balance which has been dormant for many years. On June 12, 2012, she transfers $15,000 into this account and then immediately, on the same day, transfers it into her US bank account. Even though she had a balance of $100 for most of the year except for that one day when she had $15,000, N meets the FBAR filing requirement, and therefore, must file the form for 2012.
The FBAR reporting requirement applies not only to foreign bank accounts but also to other assets such as accounts with financial institutions, certain pension plans, life insurance policies, etc. Since the penalties for non-compliance are significant, you must be thorough in gathering information, preparing, and filing this form. Individuals with prior FBAR violations should consider the 2012 Overseas Voluntary Disclosure Program.
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