The recent leak of the Panama Papers begs the question: what are the implications of having an offshore bank account when it comes to your expat tax return? The name Panama Papers is derived from the documents’ alleged connection to the law firm of Mossack Fonseca, who reportedly helped establish shell companies and offshore accounts for global powerhouses. Many world leaders are in hot water due to this huge breakthrough, because they used these offshore accounts to hide copious amounts of money. If handled properly, though, offshore bank accounts are not something to get in trouble over – but you do need to be aware of the ins and outs of tax reporting.
FATCA and Offshore Accounts
The Foreign Account Tax Compliance Act, also known as “FATCA,” is a March 2010 law that requires information reporting and withholding for payments made to some foreign financial institutions and foreign entities. This law was designed to make it easier for the IRS to keep track of US citizens and businesses that earn income from investments or deposits in foreign bank accounts.
Under FATCA, all individuals or businesses with foreign bank accounts that contain over $10,000 at any point during the tax year are required to file an FBAR form (FinCen Form 114) – this is separate from their expat tax return. The types of accounts that must be reported include financial accounts and stocks held at foreign institutions, foreign mutual funds and financial accounts held at a foreign branch of a US institution, among others.
FBAR Filing Deadlines
There are serious penalties for not filing your FBAR on time, so it’s important to keep track of these important dates.
For 2015 Tax Returns: The FBAR must be filed by June 30, 2016. There are no filing extensions.
For 2016 Tax Returns and beyond: The FBAR deadline has been changed to April 15 – the same day your expat tax return is due. There is also the option of filing a six-month extension, making the due date October 15.
In any event, if you’re living outside the US on the due date, you receive an automatic two-month extension to file.
Getting Caught Up On Reporting
While there are serious implications for not reporting your foreign bank accounts, the IRS has made it easier for you to catch up on past years’ reporting with two amnesty programs: the Streamlined Filing Procedures and the Offshore Voluntary Disclosure Program.
Streamlined Filing Procedures
This program is designed to help you catch up on delinquent taxes by eliminating any penalties incurred for the late filing of forms. This program is specifically designed for expats and US individuals who have offshore financial accounts and income, but may not have been aware of the tax reporting they needed to be doing. In order to use this method, you’d need to file the past three years of delinquent tax returns plus 6 years of delinquent FBAR forms.
Offshore Voluntary Disclosure Program (OVDP)
This is the second program offered by the IRS to become current with your expat tax returns. This program is more complicated and carries more risks. In order to utilize this program, it means the IRS or another agency has discovered your delinquency and this is your only course of action to reduce penalties. You may have a penalty of up to 50% of the balance of unreported financial accounts, in addition to legal and accounting fees.
It’s preferable to be able to take advantage of the Streamlined Program rather than the OVDP for your expat tax return and bank account reporting, so if you know you haven’t been reporting your foreign financial accounts, come forward so you can save yourself from serious penalties!
Need to Catch Up Your Taxes and Bank Account Reporting?
Greenback can help! Our team of dedicated CPAs and IRS Enrolled Agents can help you navigate this process seamlessly and hassle-free – get started today!