Due to the globalization of the world’s economy over the last few decades, many Americans are receiving an ever increasing amount of income from foreign sources. Some of this income is held in oversea banks and other financial institutions. However, due to both the use of foreign financial transactions in funding terrorism, and the number of taxpayers who have attempted to evade paying taxes, the government has begun to increasingly focus on foreign financial accounts and transactions. In recent years, the government has increased both the enforcement and the penalties for the non-reporting of foreign income and accounts. If you are a recipient of either foreign income or you have assets in a foreign financial institution, it is important that you adhere to the IRS OVDI reporting guidelines to avoid paying hefty fines and/or potential jail time.
The Bank Secrecy Act (BSA) of 1970 was a law passed to help government agencies fight money laundering. One of the requirements of the BSA is that all US persons (individual or business) must report if they have either an interest in, or signing authority over a foreign financial account if the value of the account exceeds $10,000 US dollars at any point during a calendar year. The US Patriot Act of 2001 increased the scope of these laws, making it possible for the US government to potentially confiscate ALL property of someone convicted of evading foreign financial reporting, and face up to 10 years in prison. Because of these potentially draconian penalties, it is important for anyone who has ownership or control of a foreign account or has foreign income to report this information as required.
Foreign account holders who meet the $10,000 or more guidelines are obliged to report their accounts by the filing a Report of Foreign Bank and Financial Authority. Until recently, this information was mailed directly to the US Department of the Treasury. As of June 30th, 2013, all FBAR reports are filed electronically through the Financial Crimes Enforcement Network, or FinCEN. This reporting requirement must be completed by June 30th following the end of the previous calendar year. There are no extensions to this requirement.
In addition to the FBAR requirements, taxpayers with foreign accounts totaling more than $50,000 must follow the Foreign Account Tax Compliance Act, or FACTA. When filing a tax return, this information must be reported on IRS Form 8938. The reporting requirements vary depending on filing status, if the taxpayer is living locally or abroad, the value of the accounts during a given calendar year. But, this is one further reporting requirement that must be taken into account.
The requirements for reporting income from foreign sources are the same as the requirements for reporting income from domestic sources. When filing federal income taxes, a taxpayer has used the minimum income requirements that are based on age and filing status, yet they are based on total worldwide income sources. However, there are significant differences in how the income is treated tax wise if the income is made while the taxpayer is physically in another country. Income that is acquired by a taxpayer while they are physically in another country can be exempt from taxation if the taxpayer has paid taxes in another country. It may also be exempt based on three exclusions the IRS allows: the foreign income exclusion, the foreign housing exclusion, and the foreign housing deduction.
Because of the complexities involved in reporting foreign income and foreign accounts, if you find yourself needing to report either, it may be a good idea to consult with a tax attorney who is knowledgeable about these reporting requirements. They just may help you avoid a potentially damaging financial situation. Contact or call RJS LAW at (619) 595-1655 to schedule your consultation today and learn more about IRS OVDI.
Please keep in mind the information and advice presented in this blog is not intended to be used as formal legal advice. Contact a tax professional for personalized tax advice pertaining to your specific situation. While we try and answer all parts of the question when we write our blogs, sometimes there may be some left unanswered. If you have any questions about your problems with the IRS, SBOE, FTB, or BOE, or tax law in general, call RJS Law at (619) 595-1655.
Internal Revenue Service. (2014, Feburary 24). IRS. Retrieved from https://www.irs.gov/pub/irs-pdf/p54.pdf