Penalties for U.S. Persons not reporting Foreign Accounts
Dalton, a resident of Canada, is considered to be a U.S. person for income tax purposes. He was born in Georgia, the son of a Canadian university student and a fellow graduate from Georgia State. The family moved to Canada shortly after Dalton’s birth to pursue careers in engineering.
Dalton, now working in the technology sector, may be required to file a Report of Foreign Bank and Financial Accounts (FBAR) or FinCen Form 114. The requirement kicks in if he holds accounts in Canada and those non-U.S. accounts total at least $10,000 USD at any time during a calendar year. The form must detail all foreign accounts he holds or over which he has signing authority. What’s included? These accounts include bank accounts, investment accounts like mutual funds, brokerage accounts, segregated funds, unit trusts, registered accounts and trusts where he is a trustee.?In Dalton’s case, he has much more than the equivalent of $10,000 USD in his name here in Canada when totaling the value of his various accounts.
How will the U.S. government know if certain foreign financial assets aren’t being reported?
The U.S. has entered into information sharing agreements with 39 countries and is in the final stages of finalizing information sharing agreements with 62 more. Affected parties may have to complete and file other reports about foreign assets as well. The Foreign Account Tax Compliance Act (FATCA) requires non-U.S. financial institutions to enter into an agreement with the U.S. Internal Revenue Service (IRS) to report accounts held by U.S. residents and U.S. citizens to the IRS. That includes U.S. citizens like Dalton, who are residents or citizens of Canada.
What happens if he doesn’t file the form or report all of his accounts?
Tax compliance issues for U.S. persons living abroad have increased in the past decade. Failure to file this form may result in hefty penalties, including punitive financial fees and criminal prosecution. The maximum penalty for failing to file or inaccurately filing an FBAR is $10,000 USD.
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Are penalties applied on a report basis or for each account?
One longstanding question is whether the penalty applies on a report basis for each taxation year or for each account that is not reported.
The U.S. Supreme Court (SCOTUS) ruled on Feb. 28, 2023, that penalties for non-willfully failing to file, or inaccurately filing, a Report of Foreign Bank and Financial Accounts (FBAR) Form 114 apply to each report, not to each account. The ruling was made on the case of Bittner v. United States, 21-1195.
Bittner had not filed reports for 5 years while he was living overseas.?He felt the fine should total $50,000 USD. The U.S. government and IRS believed the $10,000 USD fine should be applied on each of the accounts that Bittner held, 272 in all, totaling a whopping $2.72 Million USD.
The top court sided with Bittner, ruling that the failure to file a legally compliant report for a calendar year is considered one violation that carries a maximum penalty of $10,000 USD for each non willful failure and not a total of penalties for each account that are not reported.
What does this mean for U.S. persons holding foreign accounts? This does offer welcome clarification. U.S. persons who are non-compliant should do whatever is necessary to get onside and current with reporting if they fall within the guidelines set by the IRS according to tax professionals and cross border specialists.
? 2023 by peter a wouters