On January 17, 2013, the United States Treasury Department released their finial regulations for the implementation of the Foreign Account Tax Compliance Provisions (FATCA) from the Hiring Incentives to Restore Employment Act of 2010. The U.S. Congress put forth these rules to prevent U.S. taxpayers from using offshore account and investments to evade paying U.S. taxes, and FBAR penalties.
U.S taxpayers with foreign accounts abroad, not limited to bank accounts, brokerage accounts, mutual funds or trusts, must report these funds to the Internal Revenue Service. These accounts are reported to the IRS by a Report of Foreign Bank and Financial Accounts (FBAR) report. The FBAR is required because financial institutions outside of the U.S. do not have the same requirements in reporting as financial institutions within the U.S. The FBAR is a way for the U.S. government to ensure that taxpayers are not using foreign financial accounts to circumvent paying the proper amount of taxes.
If foreign countries who agree to the FATCA program do not comply with the requirements, foreign financial institutions will be subjected to a 30% US withholding tax on U.S.-source interest, dividends, and investment income. The institutions are not limited to depositary or custodial institutions, therefore private equity funds and investment funds are also considered financial institutions under FATCA. This means that equity and investment funds will be subject to penalties if the U.S. taxpayer fails to file an FBAR.
In 2012, a federal district court in Utah became the second federal district court to rule that “preponderance of the evidence” is the burden of proof standard for imposing FBAR penalties in U.S. v Jon McBride. The court held that since the penalty is monetary only, preponderance and not a higher standard of proof will be sufficient.
U.S. taxpayers are required to annually file a FBAR if their foreign accounts amount to more than $10,000 at any time during the year. Failure to file an FBAR has a civil penalty of the greater amount; $100,000 or 50% of the foreign account balance. If you need help understanding how to properly file a FBAR, or have any questions on if you need to report any foreign assets, a New York Tax Attorney can offer assistance.