IRS May Start to Tax Your Account in the Caymans
Editor’s Note: Due to increased scrutiny from the IRS, U.S. persons should take necessary steps to ensure that foreign accounts are accurately reported.
Consider the following: you’re a U.S. citizen, green card holder, or resident alien, and you must report your worldwide income on your Form 1040. This requirement is assumed to be true regardless of where you live in the world.
An important missing step is that these same taxpayers may also be held to the requirement to report their foreign accounts on the Foreign Bank Account Report (FBAR) and Form 8938. Unfortunately, potential penalties related to not reporting foreign accounts and assets can exceed $10,000 per document for offshore tax bills owed.
Offshore Banking Tax Letters
To give you a better sense of the governments’ international examination scope, the IRS sent 855,000 notices and letters to the 7+ million U.S. citizens living abroad. Additional taxes and penalties are not the focus of these letters.
However, you can see the high percentage of these clients receiving IRS correspondence. A possible major contributor for these notices, which would hit home in the U.S. as well, is a push from the IRS to have taxpayers get in compliance with their foreign income and account reporting requirements.
A possible major contributor for these notices, which would hit home in the U.S. as well, is a push from the IRS to have taxpayers get in compliance with their foreign income and account reporting requirements.
IRS Offshore Accounts
In addition to the IRS taking over enforcing compliance of the FBAR in the mid 2000’s, in 2010, Congress passed the Foreign Account Tax Compliance Act (FATCA), which requires all foreign financial institutions to report accounts of U.S. citizens or face a mandatory 30% withholding tax on certain U.S. sourced payments made to them.
The FACTA law also paved the way for the U.S. government to sign agreements with governments of foreign countries, forcing the hand of financial institutions to comply with the law. These agreements−now exceeding 100 countries−allow the IRS to obtain details about U.S. account holders from foreign financial institutions.
What does this mean to you, the taxpayer? It means that if you meet the filing requirements discussed below, you will want to submit the required reports for your foreign accounts in a timely manner to avoid costly penalties.
Foreign account is a misleading term for U.S. taxpayers as it includes more than just bank accounts. For FBAR and Form 8938 reporting purposes, a foreign account includes a bank, investment, or retirement account amongst others.
The FBAR (FinCEN Form 114) is filed if a U.S. person has a financial interest in or signature authority over any financial account(s) outside of the U.S. and the aggregate maximum value of the account(s) exceeds $10,000 at any time during the calendar year. Even if you don’t have to file a return,
Even if you don’t have to file a return, an FBAR is still required if you meet the set thresholds.
The filing thresholds for Form 8938 are much higher than the FBAR. However, it’s possible you may be required to file both forms.
Additionally, Form 8938 requires reporting of both foreign accounts and assets. Since Form 8938 is filed with your 1040, if you don’t have a 1040 filing requirement, then you do not have to file the form either. Following are the filing thresholds for Form 8938 for taxpayers living in the U.S. (note that the thresholds are higher for U.S. taxpayers living abroad).
You must file 8938 if the total value of all foreign assets and accounts exceeds the following thresholds and you are filing:
- Other than a joint return if the total value is more than $50,000 at the end of the year or $75,000 during the year.
- A joint return if the total value is more than $100,000 at the end of the year or $150,000 during the year.
The IRS is updating its procedures for foreign account compliance. This includes identifying when foreign financial institutions are not complying with the FATCA rules. Also, the IRS will develop a review process to ensure the accuracy of information being reported on some Form 8938s.
The IRS has also created several disclosure programs that allow taxpayers who have overlooked their filing requirements to report their income and assets with lesser penalties being assessed. These programs include the Streamlined Domestic Offshore Procedures and the Offshore Voluntary Disclosure Program (OVDP).
Moving forward, the IRS will continue its efforts to track down taxpayers out of compliance, both home and abroad. It is imperative for U.S. taxpayers with foreign accounts to ensure they understand their FBAR and Form 8938 filing requirements.
Does a Pell grant count as taxable income? Learn more from the tax experts at H&R Block.
Find out more about the gross cap on medical expenses with help from the tax experts at H&R Block.
Looking for more information about your Rhode Island refund? Find out details on how to check your refund status, who to contact, and more from H&R Block.
Learn about some of the weirdest, funniest tax deductions ever allowed by the IRS with H&R Block. You never know what wacky tax deduction could apply to you.