Tuesday , December 11, 2018

Foreign Financial Account Reporting: Complexity and Importance

  Foreign financial account reporting, despite existing for years, came into the spotlight in 2014 due to the implementation of FATCA, the Foreign Account Tax Compliance Act. While the act became law in 2010, its main provisions, which require foreign financial institutions to disclose information about U.S. customers, did not come into force until July of 2014.

     With the disclosure of accounts held in foreign financial institutions imminent, many U.S. taxpayers became aware—many due to letters from their foreign banks—that they had a filing requirement with the Department of Treasury, specifically the Financial Crimes Enforcement Network (FinCen).

     Determining who and what needs to be reported can be difficult, even for the savviest tax accountant. Below are the quick who, what, where, when, why and how of foreign financial account reporting.


Who must report foreign financial accounts?

     Any U.S. person who has a financial interest in or signature authority over foreign accounts with an aggregate value greater than $10,000 must report the account(s). A U.S. person can be an individual (either a U.S. citizen or resident), trust, estate, or any legal business entity.

      As one might expect, financial interest means ownership by a U.S. person, but it can also include indirect ownership. For example, ownership can be attributed to an individual through a business entity in which they are a 50 percent, or greater owner.

      Signature authority refers to the ability to control the disposition of assets held in the foreign account. While the U.S. person does not legally own the foreign account, they are capable of controlling it through communication with the foreign financial institution, which includes electronic funds transfers.


What must be reported to FinCen?

     Foreign financial accounts can include, but are not limited to, a simple checking or brokerage account. They can also include accounts as complex as commodity futures, life insurance policies, even foreign retirement accounts.


Where does the account have to be held in order for it to be reported?

     For an account to be reportable it must be located outside of the U.S. If the account is held in a branch of a U.S. bank located outside of the U.S., it must be reported. On the contrary, accounts held in a U.S. branch of a foreign bank need not be included.


When do the accounts need to be reported?

     Foreign financial accounts must be reported when all said accounts owned by a U.S. person have aggregated balances, at any point during the year, greater than $10,000. Each account must be assessed individually for its highest daily balance and those balances are combined to determine if the $10,000 threshold has been exceeded.

      For example, if the U.S. person has 10 accounts, with $1,000 maximum balances, at various times during the year, that U.S. person has a filing requirement. The most detailed information available must be used to determine the maximum value of an account; however, quarterly or annual account statements may be relied upon, if necessary.


Why should the accounts be reported?

     There are multiple reasons that the accounts should be reported, most importantly, because it’s the law. The penalties for not reporting when required are substantial. The penalty can be $10,000 per unreported account per year for accounts that are not reported. If the non-reporting violation is considered willful, the penalty leaps to the greater of $100,000 or 50 percent of the account balance.

      This information is collected for the same reason that the Department of Treasury collects information about cash transactions in excess of $10,000: to combat money laundering, terrorist financing, and tax evasion. As a result, noncompliance is pursued aggressively by the Treasury and penalties are punitive.


How must the accounts be reported?

     The accounts must be reported on FinCen Form 114. Form 114 must be electronically filed by June 30th of the year after the reporting year. For example, Form 114 for 2014 is due June 30th, 2015. Unlike other forms used to report information to the U.S. Treasury, Form 114 cannot be extended.

      For taxpayers with international assets, the filing requirements can be complex. In addition to Form 114, there are a number of other disclosures that may be required with your income tax return, and they carry their own stiff penalties.

     The above should provide insight into the complexity of foreign financial account reporting, as well as its importance. If you believe you may be required to report a foreign financial account, it is imperative that you consult a knowledgeable international tax advisor.

Content contributed by GreerWalker LLP, a Charlotte-based accounting and business advisory firm offering assurance, accounting, tax, and consulting services primarily to privately held middle-market companies, their owners, and their executive management teams, as well as a range of consulting services directed to publicly traded companies. Content written by Jennifer Gaitsch-Aguirre, CPA, Senior Tax Associate. For more information, contact Jennifer Gaitsch-Aguirre at jennifer.aguirre@greerwalker.com or 704-377-0239 or visit www.greerwalker.com.


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