FBAR
The April 15th income tax filing deadline is fast approaching. One of the most common questions we get lately is about the Foreign Bank Account and Financial Records (FBAR) reporting law. This is probably because the tax return form, Form 1040, has questions about foreign assets that people are considering as they prepare to file, and because of the recent government announcement of increased criminal penalties and fines for non-filers.
The law has been around for a while, but until now, it’s been one of the more difficult laws to enforce because of the difficulty the U.S. government has had in determining how much financial assets U.S. taxpayers have overseas, but the recent agreement between the U.S. and several countries, including Switzerland and South Korea, to exchange information about reciprocal offshore accounts has made it possible to enforce the law more strictly.
Unlike immigration status, the scope of who is a U.S. tax resident is broader than you might think, as it is determined by how long you have been in the U.S. and whether or not you are economically active. For example, if you have been in the U.S. for 183 days or more in the last two years, including the current year, and 31 days or more in the current year, you will be liable to pay taxes to the U.S. Therefore, not only U.S. citizens and permanent residents, but also those who are staying in the U.S. for a long period of time on an H-1B or E-2 visa will be liable to pay taxes. However, those who are temporarily in the U.S. on a student or internship visa may be exempt from paying taxes.
The Foreign Financial Account Reporting Act requires U.S. taxpayers to report to the Department of Treasury not only wages and interest earned in the U.S., but also assets held abroad if the total value of all such assets is $10,000 or more at any point during the year. Foreign financial assets include all accounts held at a bank or financial institution in a foreign country, including bank accounts, fund accounts, annuities, and accumulated life insurance policies.
The deadline for reporting foreign financial assets is June 30. Failure to report can result in criminal penalties and fines, and an important factor in determining penalties is whether the person was intentionally avoiding reporting. If it is determined that the failure to report was intentional, not only are criminal penalties possible, but the fines can be very large. If the failure to report was intentional, the penalty is up to $100,000 or 50% of the amount in the foreign account, whichever is greater. If it’s determined that there was no intent, you can be fined up to $10,000.
A law that is similar to the Foreign Financial Account Reporting Act and is often used and confused with it is the Foreign Account Tax Compliance Act (FATCA). Unlike the FBAR, which requires reporting to the Treasury Department, the FATCA requires reporting to the Internal Revenue Service (IRS). The law requires U.S. taxpayers with foreign financial assets to report them on their income tax returns. It’s important to note that reporting under the Foreign Account Tax Compliance Act differs depending on whether you’re single or married, and whether you’re a U.S. or foreign resident. If you’re required to file and you don’t, you’re subject to a $10,000 penalty, which can be up to 40% of the income from the property that you should have reported. If the penalty is determined to be willful, it can be up to 75%.
Many people who ask about these laws ask whether real estate in Korea is subject to reporting under the Foreign Bank Account Reporting Regulations (FBAR) and the Foreign Account Tax Compliance Act (FATCA). Real estate itself is not a financial asset, so it is not affected by these laws. However, if the property is an apartment, house, or storefront and generates rental income, it must be included on your income tax return as ordinary income, not under these laws.
Many Koreans living in the U.S. have financial accounts in Korea, either for investment purposes or in anticipation of returning to Korea in the future, and keep quite a bit of property there. Because of the large fines and possible criminal penalties, as well as the fact that the U.S. government has treaties with other countries to enforce the law, if you have assets in foreign financial accounts, it’s a good idea to make sure they are reportable and think about how to minimize your taxes.
If you have any further questions about the Foreign Financial Account Reporting Act and the Foreign Account Taxation Act, or if there are any other laws our readers would like to know about, please don’t hesitate to contact us at mail@songlawfirm.com. I’ll incorporate them into my next column.