Should You Close Your Foreign Bank Account
Wouldn’t it be nice if we lived in a fair world? Wouldn’t it be nice if the IRS gave the little guy a break? Unfortunately, that’s just not the way it is. The news is littered with casualties of the IRS’ aggressive stance on taxpayers who don’t come clean.
The IRS is convinced — despite all evidence to the contrary — that the way to collect more tax revenue is to go after US taxpayers who have undeclared foreign accounts. The IRS has decided that it should increase its audit of so-called wealthy taxpayers, just hoping they can land someone with undeclared bank accounts.
It is common to wonder if closing a foreign bank account can solve disclosure problems.
Unfortunately, it can’t. As numerous prosecutions make clear, the stakes have never been higher and the potential liabilities can be staggering. Consider these 10 rules:
1. You Must Report Worldwide Income. You must report your worldwide income on your U.S. income tax return. Plus, if you have an interest in a foreign bank or financial account you must check “yes” (on Schedule B). This is true even if you live outside the U.S. or pay foreign taxes on your foreign income.
2. FBARs Too. Tax return filing alone isn’t enough. All U.S. persons with foreign bank accounts exceeding $10,000 at any time during the year must file an FBAR by each June 30.
3. New Form. Now with your tax return, you may also need to file an IRS Form 8938 to report your foreign accounts and assets.
4. There Are Big Penalties. Failures can be considered tax evasion and fraud. The criminal statute of limitations is six years. Plus, the statute of limitations never expires on civil tax fraud.
5. FBAR Penalties Are Worse. The penalty for failing to file an FBAR is $10,000 for each non-willful violation. If willful, the penalty is the greater of $100,000 or 50 percent of the amount in the account for each violation. Each year you didn’t file is a separate violation.
6. You Can Even Go To Jail. Tax evasion can carry a prison term of up to five years and a fine of up to $250,000. Filing a false return can mean up to three years in prison and a fine of up to $250,000. Failing to file a tax return can mean a one year prison term and a fine of up to $100,000. Failing to file FBARs can be criminal too with monetary penalties up to $500,000 and prison for up to ten years.
7. Voluntary Disclosure Is Still An Option. If you admit your failures to the IRS and say you want to make it right, you’ve made a “voluntary disclosure.” You will pay back taxes and penalties but not be prosecuted.
8. “Quiet Disclosures” Are Discouraged. A “quiet” disclosure is a correction of past tax returns and FBARs without drawing attention to what you are doing. The IRS warns against it.
9. Prospective Compliance Only Is Risky. Can you start filing complete tax returns and FBARs prospectively, but not try to fix the past? Maybe, but the risk is that your past non-compliance will be noticed and it may then be too late to make a voluntary disclosure.
10. Disclosure Is The Key. You can have money and investments anywhere in the world as long as you disclose your foreign accounts. When in doubt, disclose.
There’s widespread confusion, misinformation and noncompliance.
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The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.