The federal government created the Foreign Account & Tax Compliance Act (FATCA) to deter U.S. citizens from storing their money in foreign accounts. This act changed the rules of handling foreign accounts. It increased self-reporting requirements and established more dire consequences for unfiled and unreported foreign financial accounts.
Here are a few important aspects of FATCA to consider:
FATCA requires foreign financial institutions to report certain information about U.S. taxpayers’ financial accounts to the IRS. To that end, you should honestly report all global income on Schedule B in your taxes—including all income and interest. You need to do that, because the IRS will have the banks’ own filings as a way to confirm the accuracy of your filings.
Next, FATCA requires that all taxpayers file an FBAR (report of Foreign Bank and Financial Accounts), if the combined total of your foreign accounts surpasses $10,000 at any time during the year.
And if the combined amount of taxpayers’ foreign accounts and assets exceed $50,000, FATCA also requires individuals to complete IRS Form 8938.
Failure to report foreign financial accounts in Form 8938 may result in a fine of $10,000—along with an additional fine of up to $50,000, if you consistently failed to report these accounts, until the IRS contacted you. Additionally, the IRS may charge you an “understatement fee” of 40% of the value of the asset or account, if you underpaid taxes related to these nondisclosed foreign financial assets.
For the average taxpayer, the odds of being audited are actually quite low. In 2015, Time Magazine reported that just 0.84% of taxpayers were audited. However, audits are more likely for those with foreign accounts: In 2015, 4.35 of those accounts were audited. Larger incomes also increase your chance of an audit: a whopping 34.69% of those with incomes of more than $10 million were audited.
If you have foreign accounts, larger incomes or other issues that may result in an IRS audit, don’t wait. Contact Highland Tax Group’s team at 720-398-6088 or visit our website to discuss how we can help protect your finances.