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FBAR and 8938: Varied tax disclosure requirements for foreign accounts

What do a Wisconsin neurosurgeon and a Long Island art dealer have in common? They both have been subject to Internal Revenue Service investigations for the willful failure to disclose offshore bank accounts.

United States persons need to file a Report of Foreign Bank and Financial Account or FBAR form for overseas accounts valued at $10,000 or more during the prior year. Signature authority on an account also triggers the filing requirement.

The filing deadline for the FBAR of June 30 is quickly approaching this year.

Criminal penalties exist when the IRS proves willful failure to disclose

In the case of the neurosurgeon, he maintained an undeclared bank account in India, which offered high interest rates between nine and ten percent. He earned almost $3 million dollars in interest income between 2005 and 2009. The income was not taxable in India, but it was taxable in the United States. This apparently is not a unique circumstance. The U.S. Department of Justice estimates that at HSBC alone Indian Americans maintained approximately 9,000 accounts, but only 1,391 FBAR forms were filed disclosing accounts in 2009.

In 2012, a federal jury found the neurosurgeon guilty on felony counts of failure to file an FBAR and filing a false income tax return. On February 1, 2013, he was sentenced to three years of probation. He will also have to pay a fine of $350,000.

Similar investigation, Spanish bank account

The art dealer was under investigation by the F.B.I for selling fake art. Then the IRS became involved when it learned of hidden assets in a Spanish bank. The agency is investigating the art dealer for failing to disclose the foreign account to the IRS.

The IRS has also expanded investigations and sought records from banks directly. For example, Julius Baer recently acknowledged receipt of a formal request from U.S. authorities for information on U.S. clients, who utilized the bank’s offshore services.

Unsuspecting account holders may also be subject to penalties

In 2010, 40 million foreign-born individuals lived in the U.S., according to the Census Bureau. With ties in other countries, many of these individuals may not realize that an account set up by Italian grandparents may need to be reported to the IRS. Similarly, if an elderly relative in another country assigned signatory authority a FBAR may be necessary.

Failure to file a FBAR, as discussed above, comes with stiff civil and possible criminal consequences. When it an account value is above the $10,000 threshold, but FBARs have not been filed for previous years, contact an experienced tax defense attorney for guidance on how to proceed.

IRS Form 8938

To make matters more complicated for U.S. citizens, foreign financial accounts with a balance of $50,000 or more on December 31 or $75,000 or more during the year require an additional form – IRS Form 8938. This form needs to be filed with a standard federal income tax return before April 15. Similar to the FBAR filing, civil and criminal penalties exist for willfully failing to report foreign account income on Form 8938.

When an inheritance includes a foreign account or you have signature authority on an overseas account, speak with a tax attorney to ensure you have filed all the proper disclosure forms. The penalties following an IRS investigation could reduce the value of an account and include the possibility of a criminal sentence for willful violations.