The tax attorneys at Nardone Law Group in Columbus, Ohio routinely advise taxpayers about their U.S. tax reporting obligations related to foreign financial accounts, as well as the importance of coming forward to report previously undisclosed foreign accounts through the Internal Revenue Service’s Offshore Voluntary Disclosure Program. Under certain circumstances, federal tax law requires a U.S. taxpayer with an interest in a foreign financial account to report that foreign financial account interest to the IRS by filing a FinCEN Form 114 (formerly Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts (“FBAR”)). Despite the FBAR filing requirement, many taxpayers continue to hold foreign bank accounts while failing to comply with U.S. tax reporting and payment obligations related to those foreign financial accounts. Often times, this is because the particular taxpayer simply does not realize that he or she is required to file the FBAR for the specific foreign account at issue. Below is a brief explanation of the FBAR filing requirement, along with a summary of the IRS’ recent guidance stating that taxpayers are not currently required to report virtual currency on the FBAR, which has become increasingly prevalent in the digital age.
FBAR Filing Requirement: Disclosing a Foreign Financial Account Interest
A U.S. citizen with a financial interest in a foreign financial account must file the FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. Such a taxpayer must also disclose any such foreign financial account on Schedule B of the taxpayer’s individual income tax return. A “financial account” includes a securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained within a financial institution or other person performing the services of a financial institution. A financial account also includes a commodity futures or options account, an insurance policy with a cash value, an annuity policy with a cash value, and shares in a mutual fund or similar pooled fund. A “foreign financial account” is a financial account located outside the United States, but also includes correspondent accounts.
Significantly, during a recent web-seminar an IRS Senior Program Analyst Rod Lundquist of the IRS’ Small Business/Self Employed division confirmed that taxpayers are not currently required to report virtual currency on the FBAR. Virtual currency is a digital demonstration of value that operates as a standard of exchange, a unit of account, or an item of value. “Convertible” virtual currency is virtual currency that has a corresponding value in real currency—such as the U.S. dollar. For example, bitcoin is a convertible virtual currency that users digitally exchange and that can be changed for U.S. dollars, Euros, and other real currencies. The debate over U.S. tax reporting requirements for foreign virtual currencies continues. But, at least for now, virtual currencies—including bitcoin—need not be reported on the FBAR based upon the IRS’ most recent guidance.
The determination as to whether a taxpayer has an obligation to file the FBAR is important, as the failure to file the FBAR when required to can have significant consequences. For instance, there are large civil and criminal penalties associated with failure to file the FBAR. The IRS will impose a civil penalty of $10,000 per violation for a non-willful violation, or 50% of the amount in the foreign financial account at the time of the violation—not to exceed $100,000—per violation for a willful violation of the FBAR filing requirement. In addition, the criminal penalty for willful FBAR violations is a fine of up to $250,000, imprisonment of up to five years, or both. Moreover, if a taxpayer willfully violates the FBAR filing requirement while violating another federal law or as part of a pattern of any illegal activity involving more than $100,000 in a 12-month period, the above noted maximum criminal penalties double to $500,000 and 10 years of incarceration.
Contact Nardone Law Group Today
Nardone Law Group represents businesses and individuals with federal and state tax issues, including identifying U.S. tax reporting and payment obligations related to foreign financial accounts and utilizing the Offshore Voluntary Disclosure Program to come into compliance related to previously undisclosed foreign accounts. If you have unreported foreign income, or an undisclosed foreign account, asset or entity, you should contact an experienced tax attorney today. Nardone Law Group’s tax lawyers and professionals have vast experience representing clients before the IRS. Our experienced tax lawyers will thoroughly review your case to determine what options and alternatives are available, including the Offshore Voluntary Disclosure Program. Contact us today for a consultation to discuss your case.