What If I Have Overseas Accounts That I Have Not Disclosed to the IRS?

Unfortunately, in recent years, the IRS has taken a hard line against individuals who have not filed the proper forms to disclose their overseas accounts.

As if trying to file your taxes is not difficult enough, if you are one of the millions of individuals with overseas bank and foreign financial accounts or earned foreign income, you have additional reporting requirements when filing your tax returns. The failure to file these forms may result in fines, penalties, seizures, levies, or worse.

Who is Required to Disclose Overseas Accounts?

If you are required to file a U.S. tax return, then depending on various threshold reporting requirements, you will also be required to disclose your foreign assets and income.

Many people get confused as to who is actually required to file a tax return. More specifically, just because you reside overseas does not mean you are relieved from filing a U.S. tax return.

Generally, the following categories of individuals must file a tax return:

  • a U.S. citizen who resides either in the United States or in a foreign country. (The fact that someone is a U.S. citizen requires that person to file a U.S. tax return, no matter where they live);
  • a Legal Permanent Resident who resides either in the United States or in a foreign country. (The mere fact that the Legal Permanent Resident resides outside of the United States does not absolve the requirement to file a tax return); and
  • foreign nationals who reside in the United States and meet the substantial presence test.

If you fall within one of the categories listed above, then unless there is another reason why you do not have to file (such as not meeting the income requirements), you are required to file a tax return and ensure that you comply with proper disclosure of your foreign accounts.

What Forms Must I File if I Have Accounts Overseas?

Depending on the type of accounts you have overseas, there are various different types of forms that may be required. For the most part, no matter what type of additional overseas assets or accounts you have, you must file the following basic forms (as long as you meet the threshold requirements):

  • Schedule B – While the Schedule B is used for domestic accounts that earn dividends and interest, the same passive income requirements do not apply if you have foreign accounts. In other words, even if you do not earn any interest or dividends on your overseas accounts, Section 7 of Schedule B requires you to complete this Schedule to identify if you have any interest in any overseas accounts despite whether you earned any income from the accounts.
  • 8938 - This form is submitted with your tax return and provides identifying information about your overseas accounts, such as the account number, maximum value, address, and exchange rate. You must file this form if on the last day of the year, you had an aggregate total of $50,000 in overseas accounts or if at any point during the year, you had $75,000 in foreign accounts. For married couples, the numbers are doubled ($100,000 and $150,000 respectively).
  • FBAR/FinCEN114 - These forms are used to report foreign accounts. They are not filed with your tax return; instead, you file them electronically directly with the Department of Treasury. In addition, unlike a U..S tax return, you have until June 30th of any given year to electronically file these forms. You are required to file the forms if at any point during the tax year, you have an annual aggregate total of $10,000 or more in foreign bank accounts. It does not matter whether it is one bank account with $10,000 in it or 20 bank accounts with $500 in it - the key phrase is the annual aggregate total of all accounts.

What Are the Penalties for Failure to File These Forms?

Unfortunately, the IRS takes a very heavy hand against individuals who fail to file these forms. The results can be harsh, especially considering the fact that it is not as if the IRS actively provides individuals who maintain overseas accounts with a clear synopsis of what is required to be filed with their tax return.

The penalties can be very high and reach upwards of $10,000 per form per year. Moreover, if the IRS determines that you were aware that you were required to file the form but willfully decided not to file the form, the penalties can reach upwards of millions of dollars depending on the value of your overseas accounts.

What Can I Do Now If I Failed to File in the Past?

The IRS understands that international tax compliance is confusing and therefore, they have developed various programs to assist taxpayers. Currently, there are two main programs: the Offshore Voluntary Disclosure Program and the Modified Streamlined Program. Both of these programs are designed to assist taxpayers with becoming compliant in IRS international tax law. Depending on the individual background of each case, taxpayers may qualify for reduced or elimination of penalties - but it is based on each individual taxpayer’s set of facts and circumstances.

If you just start disclosing your overseas accounts on your tax returns (even though you owned these accounts for a few years), without entering into an IRS compliance program can result in serious ramifications. From the IRS’s perspective, they are benefitting taxpayers by providing programs to facilitate compliance. If you attempt to circumvent the program and file documentation without paying the penalty, it is considered “silent disclosure.” The IRS has made it known that they will take serious civil and criminal action against anyone who attempts to silently disclose.

If you are in a position where you did not file appropriate tax documents to disclose your overseas accounts, you may consider contacting an experienced international tax attorney to discuss your options before reaching out to the IRS by yourself, since you only get one chance to submit to the proper program.

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