After the recent California district court decision (United States of America v. Jane Boyd), the potential for significantly higher tax penalties can be imposed on U.S. taxpayers who unintentionally fail to comply with specific foreign tax reporting requirements. In this decision, the court held that an omission of the Reports of Foreign Bank and Financial Accounts (FBAR) filing could cause the taxpayer to incur an automatic penalty of up to $10,000 per foreign financial account, rather than the current statute of $10,000 per year. This is important to keep in mind for taxpayers with multiple foreign financial accounts.
United States taxpayers are generally required to file an annual FBAR to disclose interest in or signature authority over financial accounts located outside the United States if the aggregated maximum value of those foreign accounts exceeds $10,000 at any time during the calendar year reported.
Civil penalties for the unintentional failure to comply are limited to $10,000 but currently the statute does not definitively state whether this is to be imposed annually or on a per foreign financial account basis. The California district court decision upheld that the IRS was reasonable in applying the penalty per account. This case is expected to be appealed.
Penalties Reach Further Than FBAR
However, given this interpretation of the statute, individual investors with any kind of interest in foreign financial investments should be re-evaluating their filing requirements annually. It is important to note that although this decision specifically targeted the FBAR filing, it is presumed that if it stands, it would apply to ALL foreign reporting tax forms and their respective penalties.
Below is a non-inclusive list of other foreign reporting obligations:
- Annual Return to Report Transactions with Foreign Trust and the Receipt of Foreign Gifts (Form 3520)
- Annual Information Return of Foreign trust with a U.S. Owner (Form 3520-A)
- Return by a U.S. Transferor of Property to a Foreign Corporation (Form 926)
- This could include cash, stock and securities, or intangibles
- International Boycott Report (Form 5713)
- Information Return of U.S. Persons with Respect to Certain Foreign Corporations (Form 5471)
- This includes Partnerships, Corporations, Disregarded entities and branches, Interest in (or have signature authority over)financial accounts, and Financial assets
If you have questions or concerns about your potential for foreign reporting exposure, please reach out to your trusted advisor as soon as possible to avoid significant penalties.
Lindsey Huesing is a tax staff member at ATKG. She obtained her Bachelor of Business Administration in Accounting and Master of Science in Accountancy from the University of the Incarnate Word. Lindsey can be reached at 210.733.6611 or via email at firstname.lastname@example.org.