6 Things You Need To Know About Reporting Foreign Assets to the IRS

In International Tax, Private Client Services

Do you have banking accounts, mutual funds, and other financial assets outside the US? Are you worried about whether you need to report them to the IRS? The answer is – you might! And the penalties are stiff if you are required to and don’t. 


Here’s the short version: if you have foreign accounts that exceed certain thresholds, you are required to report them. In addition, as a US person – which includes resident aliens, you have to pay income tax on your worldwide (US and foreign) income, which may include investment income. It is essential that you report your assets and income from abroad if you are required to.

Who is a US person?

You are subject to foreign asset reporting requirements if you are a US person, which includes US citizens and resident aliens.

US citizens and resident aliens have to disclose offshore accounts exceeding the aforementioned thresholds.

According to the IRS, you are a United States person if you are any of the following:

  • A citizen or resident of the United States
  • A domestic partnership or domestic corporation
  • An estate other than a foreign estate
  • Any trust if:
    • A court within the United States is able to exercise primary supervision over the administration of the trust, and
    • One or more United States persons have the authority to control all substantial decisions of the trust
  • A person that is not a foreign person

You are considered a foreign person if you are:

  • A nonresident alien
  • A foreign corporation, foreign partnership, foreign trust or foreign estate
  • Not a US person

You are a resident alien if you pass either of these two tests:

What are your options if you have undisclosed offshore accounts?

For taxpayers who have undisclosed offshore accounts, there are three options.

Option #1. Submit Delinquent FBARs

If you were not able to submit your FBARs but you have paid taxes on your foreign accounts, you may be exempt from penalties if you submit your delinquent forms. You may be eligible for this program if:

  • You did not receive any reminder from the IRS about your delinquent FBARs
  • You are not under criminal investigation or a civil examination by the IRS

You can submit the delinquent forms electronically to FinCEN. You should also include a statement explaining the reason for late filing.

If you paid all taxes related to your foreign accounts properly, the IRS will not impose any penalty.

Option #2. Engage in Compliance Procedures

If you believe that your failure to file your FBAR is not willful and you are not subject to any civil examination by the IRS, you may file your delinquent forms under the Streamlined Offshore Procedures.

Under the streamlined compliance procedure, you have to:

  • amend or file your tax return for the last 3 years
  •  file FBAR for the last 6 years
  • submit a non-willful certification

 Streamlined procedures have two forms:

  1. Streamlined Domestic Offshore Procedure (SDOP): You may apply for this program if you who live in the US. You can file SDOP if you filed your tax returns on time. Under this program, the penalty is reduced to 5% of your highest account balance at the end of the year.

  1. Streamlined Foreign Offshore Procedure (SFOP): You may apply for SFOP if you lived in a foreign country for 330 days during the 12-month period. If you lived in a foreign country for 330 days or you did not meet the Substantial Presence Test in any one of the last three years, you may be eligible for a waiver of all FBAR and FATCA penalties.

Option #3. Offshore Voluntary Disclosure Program

If your failure to disclose your offshore accounts is willful or fraudulent and you want to avoid criminal prosecution, you may be eligible for the Offshore Voluntary Disclosure Program. If your offshore accounts have large deposits or account balances, this program may be suitable for you.

Under OVDP, you need to file amended returns for a six-year period. The total penalty on your undisclosed accounts is $100K or 50% of the highest account balance whichever is greater. The IRS examiner may increase or decrease the penalty but it should not exceed 100% of the highest aggregate balance in your foreign account.

Like the programs above, you can only apply for OVDP if you are not under examination by the IRS.

Expert Advice Recommended

If you have foreign accounts to disclose or pay taxes on or if you did not disclose offshore accounts that you should have, it is recommended to get professional help. A tax expert like Cuevas & Cuevas Business Tax Advisors can help you understand your reporting obligations.

THIS INFORMATION IS PROVIDED AS A COURTESY – NOT AS LEGAL ADVICE.

Please know that we are raising the above issues as a courtesy and for informational purposes only. It is not intended as a substitute for legal advice concerning a particular situation that may be affecting your business.

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