IRS, Congress crack down on assets in foreign institutions
Over the past many years, we have seen a concerted effort by Congress and the Internal Revenue Service to force United States citizens to disclose whether they have financial assets in foreign countries. The basis for wanting to know this information is very straightforward: as tax-paying citizens of the USA, according to Section 61 of the Internal Revenue Code, we are responsible for paying taxes on income from all sources “without regard to geographic location or source.”
Since the IRS is in the business of not trusting people to report all income from all sources and, therefore to pay all of their tax due, it’s totally understandable why they would want to know who has what assets in which foreign countries. We saw the fruits of their labors in the newspapers last year when UBS, the Swiss bank, turned over the names of thousands of U.S. citizens who had upwards of at least $50,000 in the Swiss bank. It has to be noted that it is not illegal to have $50,000 or $150,000 or $1,500,000-plus in a Swiss bank or in a Canadian bank or in an Australian bank or in a Cayman Island bank. It is illegal, however, not to report the income that is generated by the money in the bank.
There might also be a question of just how a taxpayer might have accumulated that $50,000 or $150,000 or $1,500,000 in the first place. The accumulation of that money might have created some taxable income. That’s what happened to Al Capone, the Chicago gangster, back in the depression. He ended up in jail because he didn’t report income earned or how he accumulated income. It didn’t matter how Capone accumulated income. The fact is he accumulated assets and did not report how he accumulated those assets nor did he pay tax on the income from those accumulated assets.
To find out about these assets and the income associated with those assets, in 1972, Congress passed the Bank Secrecy Act. The Act requires U.S. persons to disclose if they have accounts in foreign financial institutions in which they have an interest or over which they have signature authority or are owners of a foreign trust. The disclosure starts by answering two questions on Part III, Foreign Accounts and Trust, on the Schedule B. Question 7a requires a “yes” if during the current year, the taxpayer has “an interest in or a signature or other authority over a financial account in a foreign country.” However, if the taxpayer has $10,000 or less in total value in the foreign accounts, it is perfectly acceptable to answer “no” to 7a.
Question 7b requires the taxpayer to enter the name of the foreign country if the answer to 7a is “yes.”
Question 8 requires the taxpayer to answer “yes” if a distribution was received from a foreign trust. If 7a or 8 is answered “yes,” there are additional forms to be filed.
The most common additional form is Form TD F 90-22.1, a Foreign Bank Account Report. The TD F 90-22.1, all eight pages, must be filed by June 30. It is not filed with the taxpayer’s regular income tax return, but is mailed separately to a Detroit address.
What is the penalty for not filing the form? If the form is just not filed, a civil penalty of up to $10,000 can be imposed. If there is a reasonable cause for not timely filing the form and the balance in the accounts is subsequently properly reported, the penalty can be waived. If it is deemed that the taxpayer willfully failed to file the form and does not report the balance in the accounts, a civil penalty of up to $100,000 or 50% of the balance in the accounts, whichever is greater, can be assessed. Holy cow! Now that is one of the heftiest penalties the IRS can assess. The IRS can also pursue criminal penalties if they feel it is warranted. This is serious business.
To put even more bite into the Bank Secrecy Act, Congress passed the HIRE ACT on March 18, 2010. The HIRE ACT added a new code section, 6038D, having further reporting requirements.
The Bank Secrecy Act requires certain taxpayers with $10,000 to report and file Form TD F 90-22.1, but there is a large exception if the income from the accounts is under $10,000. The HIRE ACT basically removes this income exception if the taxpayer has a total of more than $50,000 in foreign accounts. Even if the taxpayer has had not one cent of income from foreign holdings, Form TD 90-22.1 must be filed if the taxpayer has more than $50,000 in combined foreign holdings.
In addition, a new form number 8938 was created that itemizes the taxpayer’s foreign assets.
If the forms are not filed, the penalty is $10,000. This penalty can be increased by $10,000 per month if the IRS notifies the taxpayer of the requirement to file TD 90-22.1 or Form 8938 and the taxpayer does not file the forms within 90 days. The maximum penalty is $50,000 for ignoring the IRS’ request for information. Add this to the previous Bank Secrecy Act penalties of up to $100,000 or 50% of the taxpayer’s total foreign holdings and the IRS has the right to relieve certain non-complying taxpayers of a lot of their foreign wealth.
In addition, the HIRE ACT extended the statute of limitations for assessing a penalty to six years. The IRS now has six years to uncover information hidden in foreign accounts and assess any applicable penalties that might apply.
I would say Congress and the IRS are very serious about finding out who has assets in foreign institutions. The penalties are severe and, from what we understand, are not often forgiven. It’s safe to say, this area has gotten the attention of the tax professional community and we will be even more aware of the reporting requirements going forward. This is Jerry Coon signing off.
Jerry Coon is an Enrolled Agent. He owns Action Tax Service on Northland Drive in Rockford.
Contact Jerry at www.actiontaxservice.com.