The Bank Secrecy Act was originally enacted to curtail money laundering, but over the years it has morphed into a law used to catch “Swiss bank millionaires” trying to hide income in offshore bank accounts. For years, some tax cheats tried to hide income offshore in secret foreign accounts where the U.S. government couldn’t find it. After the passage of the Patriot Act in 2001, however, the federal government started seriously cracking down on these hidden foreign accounts.
The problem is many average Americans who are unaware of these rules and have foreign accounts for legitimate reasons have been caught in the compliance web.
Stringent rules require reporting ownership of, or signature authority over (for example, signing checks) certain foreign financial accounts. Although the Internal Revenue Service enforces the filing of these Foreign Bank Account Reports, typically referred to as “FBARs,” these rules actually fall under the U.S. Treasury Department and are not filed with tax returns. Instead, they must be filed electronically by June 30 with account balances for the previous calendar year, and there are no filing extensions.
Any foreign account that has an aggregate account balance at any time during a calendar year of over $10,000 must file a FBAR. Failure to do so can result in civil or even criminal penalties. The civil penalties can be up to $10,000 per account per year for non-willful violations, and the greater of $100,000 or 50 percent of the account balances for willful violations. The potential criminal penalties are far more severe, with fines of up to $250,000 and five years in prison if a person is caught trying to illegally hide money offshore. Even law-abiding U.S. citizens and residents unaware of the ins and outs of complying with these rules can be subject to staggering penalties.
The Compliance Web
Take this example: An elderly American citizen inherits a farmhouse in Ireland from her brother. The house needs repairs, but is in good enough condition to be rented out. A bank account is opened in Ireland with an opening balance of $5,000 (in euros) to deposit rents and pay renovation expenses. The American lists her son and daughter as signatories on the Irish bank account. The interest is 10 euros per year. The rental income is 1,000 euros a month. The highest balance in the account occurs on Dec. 31, when the balance reaches the euro equivalent of $15,000.
The American needs to electronically file a FBAR by the June 30 deadline or could face severe penalties. In addition, she needs to include the 10 Euros of interest on her U.S. tax return, as well as the Irish rental income. She will be entitled to a foreign tax credit for taxes paid in Ireland. There is unlikely to be much U.S. tax due on the Irish income, but the potential penalties for not reporting the Irish bank account can easily be far more than the income. In addition, her children must each file a FBAR, as they have signature authority over the account. Their failure to do so could also result in penalties.
Beyond Checking and Savings Accounts
It is important to note that these rules do not just cover ordinary bank savings and checking accounts. Reporting is required for foreign bank accounts, brokerage accounts, CDs, annuities, retirement accounts, real estate owned indirectly through a trust and even life insurance policies if there is an investment component.
For example, an electrical engineer originally from Australia, who moved to the United States for work and eventually becomes a citizen, has an Australian retirement account from his career prior to moving to the United States. As he plans to eventually retire to Australia, he keeps part of his nest egg in his Australian retirement account.
The engineer needs to file FBARs with the U.S. government, even though the money in his Australian financial account is attributable to money he earned in Australia before he moved to the U.S., and despite never having brought those funds to America. Failure to do so can result in enormous penalties.
In recent years, the U.S. government has been aggressively enforcing these overseas financial account reporting rules. Just a few years ago the odds of someone getting caught with an unreported foreign account was low. However, under relatively new FACTA (Fair and Accurate Credit Transactions Act) rules, the U.S. government is requiring foreign financial institutions to report the identities of their U.S. customers. If U.S. citizens and residents do not self-report their offshore accounts, the U.S. government may well get notice of this noncompliance directly from the foreign institution—even Swiss banks.
Tony Sayess is an attorney at the law firm of Rath, Young and Pignatelli, P.C. in Concord. He can be reached at 603-410-4341 or aks@rathlaw.com. For more information, visit www.rathlaw.com.
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