REPORTING REQUIREMENTS FOR FOREIGN FINANCIAL ASSETS by Karla Hopkins

Under the Bank Secrecy Act, U.S. persons with a financial interest in bank and other financial accounts in foreign countries are subject to a reporting requirement if the value of the accounts exceeds $10,000.
Failure to report can result in severe civil and/or criminal penalties.

The term U.S. person includes citizens, residents, corporations, partnerships, LLCs, Trusts or similar organizations created under U.S. laws. A resident refers to a noncitizen who is present in the U.S. a certain number of days in the current and preceding two years.

The maximum value of $10,000 is the largest amount of assets appearing on a quarterly or more frequent account statement in a year, converted to U.S. currency.

Foreign financial accounts that are reportable include bank accounts, accounts with persons engaged in the business of buying, selling, trading or holding stock or other securities and “other” financial accounts. The last term includes insurance and annuity policies with a cash value and also mutual accounts with mutual funds or similar pooled investments. Disclosure is not required for individual bonds, notes or stock certificates held by a taxpayer.

Financial interest includes the obvious such as legal title but it also includes a more indirect ownership. A U.S. citizen who directly or indirectly owns more than 50% of the total value or voting power of the stock in a corporation has a financial interest in the foreign financial accounts that the corporation owns. A financial interest also exists if a U.S. person has signature authority over a foreign financial account.

Failure to provide the IRS with the required information creates the potential for significant civil and criminal penalties. A taxpayer who willfully fails to file faces a civil penalty equal to the greater of $100,000 or 50% of the foreign financial account balance. This penalty applies to each year open under the statute of limitation which means that if the nondisclosure lasts several years, the penalty could easily exceed the amount in the account. Criminal penalties include a fine of $250,000 and/or five years prison.

Regardless of whether the IRS has brought this to the attention of the taxpayer, you should proactively volunteer reporting under the Bank Secrecy Act.