Do you have a bank account in a foreign county? Yes or No.
If the answer is no, you don’t have a foreign bank account, you can’t sign for anyone with a foreign bank account (like when your parent keeps you as a signer to the account in case something happens to them) —then you’re done here. If your answer is “yes” or “maybe” — keep reading.
Did you know that you are supposed to report that you own a foreign bank account to the IRS on your tax return? The question about foreign bank accounts is on something called Schedule B—that’s where you report your interest and dividends. The problem is many people with foreign bank accounts don’t know that they’re supposed to report their foreign interest. They don’t even look at the Schedule B so they don’t see the question!
Why is this such a big deal? Because, if you own a foreign bank account and you don’t submit the proper forms to the IRS about them, you could be subject to thousands of dollars in fines and penalties. Let me repeat that: THOUSANDS OF DOLLARS IN FINES AND PENALTIES!
The IRS doesn’t take “I didn’t know” as a proper excuse for not reporting foreign income. And if you’ve never seen the question for Schedule B—you don’t even know the question is there. Even if you’re having your taxes professionally done—if you’re not reporting interest income, the question may never get asked because it shows up in the interest income section of the interview.
So, do you have a foreign bank account? Yes or No?
If yes, then do you now, or did you at any time during the year have over $10,000 (US equivalent) in the account? If yes, then you’ll have to file a form called the FinCEN 114. (It used to be called the TD F 90-22.1 but it’s also known as the FBAR.) This is a form that gets filed separately from your tax return. (The new form isn’t up in the IRS website yet.)
If you had over $50,000 in the account, you’ll be required to file form 8938, a Statement of Foreign Financial Assets which gets filed along with your tax return. http://www.irs.gov/pub/irs-pdf/f8938.pdf
The bottom line is—if you’ve got foreign assets, you need to be reporting them on your US tax return. Even if you’re earning no interest on these accounts, you still have to report that you own them. If you are earning interest or dividends on these accounts, you need to report that on your US tax return and pay the tax on them. If you’re paying taxes on that money to a foreign country, you may get a credit on your US return for those taxes you already paid.
Reporting foreign income and accounts can be confusing, but you don’t have to do it alone. Roberg Tax Solutions can help you.
So you were working on your tax return and you read that you needed to prepare a form TD F 90.22.1, right? That’s a mouthful isn’t it? That’s why it’s been nicknamed the FBAR. If you need to file the FBAR, it’s really not that difficult. Let me walk you through it.
First, you need the form. It’s on the IRS website, here’s a link to get it: http://www.irs.gov/pub/irs-pdf/f90221.pdf. Most software programs do not include the FBAR form in them. My professional software finally added the FBAR this year, which makes it an incredible time saver, but most at home programs still don’t include it because the FBAR isn’t filed with your income tax return. I’m going to give you the instructions based on doing the form on the IRS website.
First, for Box 1, in the upper right hand corner, you’ll need to input the year. So right now you’re doing 2011. The input is a little goofy – you have to hit tab to get to the next number. You’ll type 2 tab 0 tab 1 tab 1. As you try to move through the document, the tab key can always get you to the next box. (I prefer using the mouse myself, but the tab key will get you where you need to go.)
Box 2, Type of Filer: I’m usually working with individuals, but partnerships, corporations and trusts with foreign accounts are all required to report these accounts. If you’re a person filing a 1040, you would check “individual.” If you are a married couple and you and your spouse both have foreign accounts, you would each file an FBAR in your own name.
Box 3, US Taxpayer Identification Number: that’s going to be your Social Security Number or ITIN. If you don’t have one, you’ll need to complete box 4; otherwise box 4 is left blank.
Boxes 5 through 13 are pretty simple: your date of birth, your name, and where you live. Where is says “Country,” it refers to the country where you live, not the country your bank account is in.
Box 14 asks if you have 25 or more financial accounts. Most people just have one or two. But if you have 25 or more check the “yes” box and you don’t have to fill out parts 2 and 3. I also suspect that you’d better keep really good records for the IRS if you check the yes box, so don’t check “yes” just to avoid having to fill out the other parts. You’re basically telling the IRS that your accounts will require more scrutiny if you do.
Part II is about your actual accounts. Box 15 is asking for the maximum amount of funds that you had in the account all year. They are asking about the account in US Dollars. (You can see my post about reporting interest income to learn how to use the currency converter if you need help with that.) What I mean by the maximum amount of funds during the year is exactly that. What’s the most money that was in there all year? For example: let’s say you started the year with $20,000 USD, and you ended the year with $20,000 USD – well you’d think that you’d put $20,000 USD down in the box. But, maybe you transferred $10,000 USD into the account in the middle of the year to help your parents buy a new house. So that means the highest amount you had in that bank account was $30,000 USD, even though that amount was only temporary.
Box 16 is what type of account – bank, securities, or other.
Boxes 17 through 23 are all basic – name of bank, address of bank, what’s your account number, etc.
If you have more than one foreign account, there are continuation pages where you can list your other accounts. If you only have one foreign account, you’re almost done.
Be sure to sign the form at the bottom. If you’re an individual, you don’t need to put anything in the title box. Don’t forget to date your return.
The FBAR does not go with your federal income tax return. It gets mailed separately to an address in Detroit:
Department of the Treasury
Post Office Box 32621
Detroit, MI 48232-0621
The FBAR form is not required to be filed until June 30th. But why would you wait? Since you’re doing this because you had to report the information on your US income tax return, just finish the FBAR form and mail it in now so you don’t forget.
More FBAR information: http://www.irs.gov/businesses/small/article/0,,id=148849,00.html
Maybe you’ve heard the stories in the news. The IRS is cracking down on persons with foreign bank accounts who don’t report their income. The penalties for not reporting can be severe. So how do you report your foreign bank account income anyway? Surprisingly, it’s not really all that hard.
The first thing to do is to take a look at your foreign bank statement. Did you earn any interest on the account? How much?
Okay, but I’m guessing your statement is in a foreign currency. So you’re going to have to use a currency conversion rate. While there are several currency exchange websites, I like to use the US Department of Treasury exchange. That’s the one the IRS links to, so when I’m working on tax forms I like to use that rate. Here’s the link: http://fms.treas.gov/intn.html#rates
When you go to the exchange site, you’ll notice that the list is by country name, in alphabetical order. So let’s say that your foreign bank account deals in rupees; we’ll scroll down until we find India-Rupee. The exchange rate for rupees on December 31, 2011 was 52.25 rupees to one US dollar. So if you had earned interest of 1000 rupees in an Indian bank, that would be the equivalent of $19.14 USD. (Because you would take 1000 and divide by 52.25. That equals 19.13876, which you’d round to $19.14.)
You’d report that interest on Schedule B of your US income tax return.
At the bottom of the Schedule B form there is a question:
At any time during 2011, did you have a financial interest in or signature authority over a financial account (such as a bank account, securities, account, or brokerage account) located in a foreign country? See instructions.
It’s a yes or no answer. If you read the instructions, you’ll find that you don’t have to say “yes” unless your foreign bank account has had the equivalent of $10,000 USD or more in it. If your foreign bank or securities accounts do have more than $10,000 in them, you will be required to complete the FBAR form, also known as the TD F 90-22.1. (I’ll make another post about that later this week.) The FBAR is not sent with the 1040 so you can do that separately from your tax return.
If you are using tax software, you may find the questions to be a little different. They may specifically ask–did you have a foreign bank account and did you have over $10,000 in that bank account. Just answer the questions honestly and your software will guide you.
If you are filing an FBAR, the IRS wants you to list the name of the country that your bank account is in on your 1040. There’s a little blank space right after the question about foreign accounts.
And don’t forget to answer the last question about foreign trusts. To be honest, I don’t do foreign trusts, so I’ve never had to say yes. If you’re involved with a foreign trust, you’re going to want to look elsewhere to get more information. But, if you don’t have a foreign trust, you just have to remember to mark the box “no”.
Now that you see how easy it is to report your foreign interest income, you don’t have to worry about the IRS coming to call over your foreign bank account.
Note: We try to answer all the questions that come to us but please be patient. It’s our busy season right now. We may not get to your post until the weekend. When you make a post and use the capcha code, it won’t immediately show up. You see, for every normal person like you that posts, there’s about three advertisements for things your mother wouldn’t approve of. (We try to keep this a G rated website.) We have to edit those out. If you need an answer right away, here are some links that might help:
How to find free tax preparers: http://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers
How to find your local IRS office: http://www.irs.gov/uac/Contact-Your-Local-IRS-Office-1
If you want to hire us, please call (314) 275-9160 or email us. We do prepare returns for people all over the country (and a few foreign countries as well.) We are sorry but we cannot prepare an EIC return for someone outside of the St. Louis area because of the due diligence requirements.
Do you have money in a foreign bank account? Yes-keep reading, No-you’re done.
Have you ever had more than the equivalent of $10,000 US currency in a non-US account over the past 10 years? Yes-keep reading, No-you’re done.
Have you reported the interest income from this account on your tax return every year and filed the TD F 90-22.1 form (also known as the FBAR)? Yes-you’re done. No-keep reading.
If you’re still reading, then you need to know about the Offshore Voluntary Disclosure Initiative. Basically, you have until August 31, 2011 to report to the IRS all of your undisclosed income from offshore accounts and get current on your tax return.
The quick and dirty of it is: if you have investments overseas that are worth over $10,000 and you haven’t been reporting that income on your US tax return, the fines and penalties for getting caught are outrageous. The penalty for failing to file your TD F 90-22.1 (FBAR) can be as high as the greater of $100,000 or 50% of the total balance of the foreign account per violation. If the IRS decides that fraud penalties should apply, the fraud penalty is essentially 75% of the unpaid tax. Even if they don’t charge you with fraud, there are failure-to-pay penalties of up to 25% of your unpaid tax and accuracy related penalties which run from 20 to 40% of the tax owed.
You could even face criminal charges. If you’re convicted of tax evasion, you could be subject to up to five years in prison and a fine of up to $250,000. The penalty for filing a false return is up to three years in prison with a fine of up to $250,000. And the penalty for failing to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR could lead to up to 10 years in prison and fines of up to $500,000.
Now that I’ve got you scared to death, I’m sorry. Let’s face it, you’re not a criminal. You were probably just sending money home to help your family and no one ever told you about this FBAR stuff before. At least that’s what I’m hearing from people. And I apologize for not blogging about this before. I file lots of FBARS for my international clients; its standard procedure. I guess I didn’t realize how many people were unaware of that requirement.
But you’ve got a deadline of August 31 to meet, so you’d better get your stuff together. You need:
1. Copies of previously filed federal tax returns for all the years covered by the voluntary disclosure
2. Complete and accurate amended federal returns (form 1040X) for all years covered by the voluntary disclosure
3. Complete and accurate form TD F 90-22.1 (FBAR) for calendar years 2003 through 2010
4. You’ll have to cooperate in the voluntary disclosure process, provide information on offshore financial accounts, institutions and facilitators. You’ll also have to sign agreements to extend the period of time for assessing tax and penalties.
5. You’ll have to pay the 20% accuracy-related penalties on the full amount of your underpayments of tax for all years, plus the failure to file penalties if applicable, and the failure to pay penalties if applicable, or you could pay, in lieu of all other penalties that may apply, including FBAR and offshore-related information return penalties, a miscellaneous Title 26 offshore penalty equal to 25% of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the period covered by the voluntary disclosure. (Some taxpayers will be eligible to pay 5 or 12.5% penalties under certain narrow circumstances);
6. You’ll have to submit full payment of all tax, interest and penalties with the required submissions or make good faith arrangements with the IRS to pay that amount in full.
7. Execute a closing agreement on Final Determination Covering Specific Matters, form 906.
That’s a boatload of information to pull together and a substantial amount of penalty to pay as well. Considering that you could be facing huge fines and imprisonment, it’s worth the effort to get it done and get it done now.
This is a very important issue and there’s a lot more information than just what you can get out of my little blog. If you need to do the OVDI, you need to check out the IRS website. This link will take you to the main page on the Offshore Voluntary Disclosure Initiative: http://www.irs.gov/newsroom/article/0,,id=234900,00.html
That page also has links to instructions in several languages, including Hindi, Chinese and Russian.
Personally, I find the Questions and Answers page to be the most helpful: http://www.irs.gov/businesses/international/article/0,,id=235699,00.html