48.7 Penalties for Not Reporting Foreign Financial Accounts

If you have financial interests in foreign bank accounts or other foreign financial accounts or assets, you may be required to file Form TD F 90-22.1, Form 8938, or both. The Form TD F 90-22.1 requirements have been in effect for many years, whereas the Form 8938 requirements generally took effect in 2011. Check the filing requirements for both forms, as you may be required to file both depending on your holdings. Failure to file a required form may result in substantial penalties.

Form TD F 90-22.1(FBAR).

Form TD F 90-22.1 is generally referred to as the “FBAR”, the Report of Foreign Bank and Financial Accounts. You have to file a FBAR if you have a financial interest in or signature authority over foreign bank or other financial accounts and the aggregate value of the accounts at any time during the year exceeds $10,000. The FBAR, if required, is not filed with your income tax reurn. It is filed with the Department of the Treasury by June 30 of the year following the year in which you had the foreign financial interest. Thus, the FBAR for 2012 foreign holdings must be filed by June 30, 2013.

On Schedule B (Form 1040 or 1040A) you must tell the IRS if you had a financial interest in or signature interest over a financial account located in a foreign country. If you answer yes, you are directed to the FBAR instructions to determine if you must file the form, and if you do, you are asked to enter in Part III of Schedule B the name of the foreign country where the financial account is located.

Penalties. If you are required to file a FBAR and fail to do so, a civil penalty of up to $10,000 may be imposed if the violation was not willful. The penalty may be waived if there was reasonable cause for the failure and a FBAR is properly filed. For a willful failure to file, the civil penalty can be up to the greater of $100,000 or 50% of the account balance; criminal penalties may also apply.

Form 8938.

Form 8938 must be filed with Form 1040 if you have specified foreign financial assets (SFFAs) at the end of the year in excess of the applicable threshold. SFFAs include, in addition to financial accounts maintained by foreign financial institutions, foreign stocks and securities, financial instruments or contracts issued by a foreign party, and interests in certain foreign estates, trusts, and partnerships. The Form 8938 instructions have detailed definitions of SFFAs and exceptions.

The reporting threshold depends on whether you live in the U.S. or abroad and whether you are married filing jointly. For example, unmarried taxpayers living in the U.S., and married taxpayers filing separately and living in the U.S., must file Form 8938 with their 2012 Form 1040 if the total value of their SFFAs on the last day of 2012 exceeded $50,000, or if the value exceeded $75,000 at any time in 2012. For married couples filing jointly and living in the U.S., reporting on Form 8938 is required if the year-end value of their SFFAs exceeded $100,000, or over $150,000 at any time during the year. For a U.S. citizen living abroad who has been a bona fide foreign resident for a full year or who meets a 330-day physical presence test, Form 8938 must be filed if the year-end value of SFFAs exceeded $200,000, or exceeded $300,000 at any time during the year; these thresholds are doubled to $400,000/$600,000 for married couples filing jointly. The Form 8938 instructions have examples of situations in which filing is and is not required.

Penalties. Failure to file Form 8938, or understating tax by omitting income attributable to an undisclosed SFFA, can result in substantial penalties.

There is a $10,000 penalty for not filing a complete and correct Form 8938 by the due date (including extensions) of your return, and a continuing failure to file within 90 days after receiving IRS notice to file may result in additional $10,000 penalties for each 30-day period, up to a maximum additional penalty of $50,000 (for a maximum penalty of $60,000). If you can show reasonable cause for not filing Form 8938 or not reporting one or more SFFAs, the penalty can be avoided.

As noted at 48.6, an accuracy-related penalty may be imposed if you do not disclose an SFFA and income related to the undisclosed SFFA is not reported on your return. The penalty is 40% of the tax underpayment resulting from the omission of income. The penalty can be avoided if you can show reasonable cause for the underpayment. An underpayment due to fraud is subject to a 75% penalty.