Kelly Bullis: Avoiding paying FBAR penalties
It amazes me how many folks actually have a foreign bank account. Perhaps they inherited it from a family member in Canada or Mexico? Perhaps they travel for business purposes and hold a local bank account to have an ATM card for purchases while in that country. Perhaps they have some property in a foreign country and need a local bank account for handling transactions, etc.
Congress has directed the IRS to find unreported overseas income. The IRS in its infinite wisdom has decided that finding that unreported income might be tied to foreign bank accounts. So, they went out of their way to get tax treaties with almost every country in the world to have their local banks report all U.S. owners to the IRS.
But wait, there’s more. The IRS wants you to volunteer your holdings in a foreign bank account. Probably because not all foreign banks are very good at informing the IRS? To “encourage” your voluntary cooperation, Congress created some very nasty penalties.
The first hurdle you need to get over is knowing if your foreign bank account had at least $10,000 or more in it for any day of the reporting year.
If the answer is yes, you had at least $10,000 in a foreign bank account, the penalty for not reporting that to the IRS, is the greater of $100,000 or 50% of the balance in the account for each violation. There could also be a prison term of up to five years! OUCH!
How to avoid this FBAR penalty? File a form 114 with the IRS, informing them of your foreign bank account(s) and the highest value that was in them for the prior year. This form MUST be filed electronically.
Remember that this frantic “reporting” on foreign activities was because of the IRS fear of folks not reporting income from outside of the U.S.? There are more reporting requirements and associated penalties besides foreign bank accounts.
If you own interest in a corporation in a foreign country, there are special forms that must be filed, depending on who owns the business (you or a U.S. corporation, etc.) There are specialized forms to file that report some information on the foreign corporation income and asset/liabilities. At this point, if you qualify for this, you need professional tax help, there is not enough room in this column to go over all the complexities. Do NOT ignore this if you have any foreign holdings. Seek out help.
Have you heard? Prov 14:35 says, “A servant who deals wisely has the king’s favor, but his wrath falls on one who acts shamefully.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at BullisAndCo.com. Also on Facebook.