June 06, 2019

The IRS compiles an annual list of “tax scams,” known as the “Dirty Dozen” list. Its 2019 list, published in March, includes “offshore tax avoidance,” or “failure to report offshore funds.” This refers to taxpayers’ obligation under the Foreign Account Tax Compliance Act (FATCA) to report financial assets held in foreign countries to the IRS. This reporting requirement is different from the Report of Foreign Bank and Financial Accounts (FBAR), which is required by the Bank Secrecy Act (BSA). The two requirements may seem redundant, and they often overlap. They go to different agencies within the Department of the Treasury and have separate penalties for non-compliance.

The “Dirty Dozen” list functions as much as a warning to taxpayers about not perpetrating tax scams as a warning about possible scams targeting taxpayers. Half of the items on this year’s list address scams directed at taxpayers. These include several scams that involve people posing as IRS agents in phone or email communications, “unscrupulous return preparers,” and various identity theft schemes. The other half of the list involves attempts to game federal tax laws and regulations. Aside from offshore tax avoidance, the list includes padding tax deductions, falsely claiming tax credits, “abusive tax shelters,” and “frivolous tax arguments.”

Congress enacted FATCA in 2010 in an effort to identify U.S. citizens, residents, and business entities with financial assets in foreign countries. This includes U.S. citizens living abroad. It requires U.S. taxpayers to self-report foreign financial assets,. It also requires foreign financial institutions (FFIs) to identify and report accounts held by U.S. taxpayers, and in some cases to withhold certain amounts from accounts of non-compliant U.S. taxpayers. The provisions affecting FFIs are generally not enforceable without an agreement between the IRS and the FFI, or the government of the country where the FFI is located.

U.S. taxpayers must report foreign assets to the IRS using Form 8938, Statement of Specified Foreign Financial Assets. The form requires a summary of such assets, followed by detailed information on each account. For U.S. taxpayers in the U.S., the reporting requirement is triggered for an unmarried individual, or a married individual filing separately, when the total value of assets deposited in FFIs is greater than $50,000 at the end of the year, or greater than $75,000 at any point during the year. For U.S. citizens living outside the U.S., those numbers are $200,000 and $300,000, respectively. For married individuals filing jointly, those numbers are doubled in either case. For business entities obligated to report, the number is $50,000, either at year’s end or at any point during the year.

Failure to file Form 8938 results in a fine of $10,000. If the failure continues after the IRS sends a notice to the taxpayer, the penalty increases by $10,000 every thirty days, up to a maximum of $50,000. The penalty may be waived if the failure to file was due to “reasonable cause,” and not “willful neglect.”

A taxpayer’s obligation, or lack thereof, to file Form 8938 is unrelated to the obligation to file an FBAR. That form is received by the Financial Crimes Enforcement Network (FinCEN), part of the Treasury separate from the IRS. The threshold for mandatory FBAR reporting is different, but the two may overlap.

If you have questions about taxes in California, the Enterprise Consultants Group’s tax advisors are available to assist you. Please contact us today online or at (800) 575-9284 to discuss your case.

Tagged: FATCA and FBAR

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