Foreign Asset Reporting Roundup

By Stanley Rose March 20, 2014

A Note from the Editor

Our newsletters in recent years have provided a lot of information regarding foreign asset reporting requirements, and the purpose of this note is to introduce the next one and put the cumulative material into context for you. Like it or not, the rules apply, and we continue to share information with our readers about these surreal requirements. If ever there was an area of federal tax law where someone should not “kick the can down the road,” this is it; the penalties are too severe to ignore. As always, feel free to let us know how we are doing, and if you find the information in our newsletter helpful. For questions regarding the rules discussed below and in the related articles, please contact Stuart Lyons.

Background

Many U.S. residents have business and personal dealings outside of the country and it is common for them to have cash held in foreign bank accounts, shares of a closely-held foreign corporation or revenue-generating foreign real estate. Each of these scenarios may require the filing of informational forms with the IRS or Treasury Department, such as Forms FinCen 114, 5471 and 8938. The consequences of not filing can be nothing short of obscene, with penalties that vary from $10,000 to 50% of the value of the foreign holdings per year. Also, criminal charges may result, and the IRS has stepped up enforcement of these filings. (They even changed the name of one form from the benign TD F 90-22.1 “Report of Foreign Bank and Financial Accounts” to “Financial Crimes Enforcement Network” (FinCEN) Form 114, so now even law-abiding citizens have to file a form that alludes to criminal acts!) The Taxpayer Advocate Service is a division of the IRS that polices the rest of the IRS, much like an internal affairs division polices police officers. The Taxpayer Advocate, in multiple reports to Congress, has lambasted IRS treatment of taxpayers in this area, including the requirement of duplicative filings (one asset can require two forms) and their rollout of confusing compliance programs (like those discussed in Isaiah Warren’s article in this month’s newsletter). Also, the Advocate points out that these programs seem to unfairly punish the innocent little guy (my words). Unfortunately, these ridiculous penalties often hurt those who didn’t underreport any income at all, but simply overlooked the filing of a form merely listing the existence of a foreign asset – sometimes a relatively modest one. Instead, these harsh penalties should be reserved to punish those who deliberately omit foreign income from their returns.

Here is a roadmap for more information:

1. How to come clean on delinquent foreign filings?
2. What assets trip the filing requirements? What forms are required? See our June 2013 article.
3. What if I need more information? Who can discuss this with me? Stuart Lyons has written several articles addressing this subject. Stuart heads up BNN’s international tax practice, and can help answer any questions you have regarding compliance with these rules.