Under the Bank Secrecy Act, U.S. citizens, residents and persons doing business in the United States are required to file Form TD F 90-22.1, a Report of Foreign Bank and Financial Account, with the U.S. Treasury if the person has a financial interest in or has signatory authority over a financial account in a foreign country, if the aggregate value of such financial accounts exceeds $10,000 at any time during the calendar year. These Foreign Bank Act Reports (FBAR) are due annually on or before June 30, and are not filed with, or extended by, the person's income tax return. A corporation that owns directly or indirectly more than 50 percent of one or more other entities may file a consolidated Form TD F 90-22.1 for itself and such other entities. Individuals must also answer the question on Form 1040, Schedule B about their ownership or signatory authority over a foreign amount.
Willfully failing to file Form TD F 90-22.1 is punishable both civilly and criminally. These include criminal prosecution for tax and FBAR failures, carrying fines up to $250,000 and/or five years in prison for each offense or failure. Any person that willfully violates the reporting requirement is subject to a civil penalty of not more than the greater of 50% of the transaction amount (in the case of a violation involving a transaction) or account balance (in the case of a violation involving a failure to report an account or an identifying number with respect to an account), or $100,000. Non-willful violations may be subject to a penalty of up to $10,000. The penalty for a non-willful violation, however, is not imposed if the violation was due to reasonable cause. Any person who fails to file the report, who files a report that contains a material omission or misstatement, or who structures a transaction to evade the reporting requirements also may be assessed a civil penalty up to the amount involved, less any amount forfeited to the government.
The recently enacted Account Tax Compliance Act ("FATCA") provisions of the Hiring Incentives to Restore Employment Act of 2010 requires additional reporting of an interest in a “specified foreign financial asset” for tax years beginning after March 18, 2010. FACTA reporting does not replace, but simply supplements, required FBAR reporting.
Unlike FBAR’s, which are filed with the Treasury Department, FACTA filings are filed as attachments to the taxpayers federal income tax return. The FACTA disclosures are required to be disclosed as an attachment to the individual tax return for tax years beginning after March 18, 2010. The minimum penalty for failing to submit the FACTA disclosures is $10,000. The penalty increases $10,000 for each 30-day period of continued failure to report, up to a maximum penalty of $50,000.
Reporting under FACTA is required for $50,000 or more of value of “specified foreign financial assets” that are broader in scope than the financial interests which trigger an FBAR filing. These include investments owned through Foreign Financial Institutions (FFI), such as foreign banks, brokers, and investment funds, including private equity and hedge funds as well as securitization vehicles. These FFIs will be required to file FACTA reports starting in 2013 and disclose the identity of holders of FACTA asset accounts in those reports. In many cases FATCA imposes a 30 percent withholding tax, which operates separately from the U.S. nonresident withholding tax imposed under other provisions of the Internal Revenue Code.
Foreign Trust and Gift Reporting
Foreign Trust Reporting on Form 3520 or 3520-A is required if, directly or indirectly, a taxpayer
- Created, made loans or contributions to, or received distributions from, a foreign trust including through
credit or debit cards from a foreign trust
- Received a gift or inheritance from a foreign person of $100,000 or greater during year
- received funds from a non-owned foreign corporation or partnership
There are both potential criminal and civil penalties. The Civil penalty is 35% of the transaction amount and $10,000 for each 30 day delinquency 90 days after notice from IRS.
Foreign Corporation Information Report
Form 5471 is required annually from a U.S. person who is an owner, director or officer of a Foreign Corporation, or who controls a foreign corporation. For this purpose ownership of 10% or more is sufficient or 50% control regardless of ownership. Transfers to a foreign corporation require a report on a form 926.
Civil and Criminal Tax Penalties for Foreign Reporting Failures
Willful failures to file any of the required reports, or to evade or defeat taxes in these circumstances, can lead to criminal penalties of up to five years in jail per count, plus significant criminal fines. The statutes of limitations are generally 5 or 6 years from the last act or failure in furtherance of the crime.
In addition to the specific failure to file penalties under the non-tax statutes, such as the Bank Secrecy Act, civil monetary tax penalties, for failures to file required reports for reportable corporations and partnerships, transfers to a foreign partnership, corporation or trust, and failures to report foreign gifts or inheritances include:
- Civil fraud (75%) of tax
- Failure to file or pay penalties
- Failure to file foreign partnership information returns:
|• up to $50,000 per return plus up to $100,000 of the value of property transferred to the foreign partnership
- Failure to file foreign corporation information return
- Failure to report transfer to foreign corporation
- Failure to file a form 3520 to report a foreign gift or inheritance up to 25% of value, or transfer to or from a foreign trust of at least 35% of amount transferred
- Failure to file a form 3520-A to report a foreign gift grantor trust interest up to 5% of assets