Interviewing Clients for Foreign Financial Accounts -- Questions your colleagues asked
Updated: Dec 28, 2019
When I do a webinar, my goal is to deliver important and useful content, and with over a thousand people in attendance at most of them, it's hard to get to everyone's questions. And many of the questions require more than a quick off-the-cuff answer.
Please note that I am not giving you specific tax advice, and you are required to do your own research. If necessary, hire a professional to work with you or turn your cases over to a professional with more experience in this area.
Here are some of the questions received (note we don't receive all questions from the webinars):
Q1: Is $10,000 maximum per country? Or everything which is outside the U.S.?
(similar question) Does the aggregate mean per country or for all countries? In other words, if they have a $5K account in Germany and a $5K account in the UK, does that create an FBAR requirement?
A1: The FBAR filing threshold is for accounts held at non-U.S. financial institutions that total over $10,000 in aggregate. The specific country doesn't matter; once you have established that an account is outside the U.S., it's a foreign account. If you add up all of the high balances of each respective account and it's over the threshold, there is a filing requirement.
Q2: What if a client doesn't provide information for all the accounts? We generally proceed with what information they provide. Of course, we take signature from client that they provided all required info. Is this right? Or should we just not prepare the return?
A2: It is the client's responsibility to provide all of the information. If you have knowledge that there is something unreported because the client doesn't feel like chasing down the documentation, you cannot prepare the tax return or FBAR knowing it's incomplete.
Q4: What is the statute of limitations for the FBAR?
A4: The statue of limitations is 6 years from the date on which the FBAR was originally due.
Q5: If a non-resident, dual citizen has a non-interest bearing checking account, do we still answer the question on Schedule B (assuming no interest income)?
A5: Schedule B Part III asks if a foreign account exists - it doesn't matter if there is nothing earned in the accounts. The first checkbox must be ticked if there are any accounts that are outside the US. If the accounts in aggregate don't go over the filing threshold, then the second box is checked no, but all questions in that section must be answered and Schedule B must be filed.
Q6: Is virtual currency (such as Bitcoin) considered foreign?
A6: It depends on if the virtual currency is held by an exchange in or out of the U.S. If there is a foreign exchange holding the virtual currency, that account should be reported. At this time, there is conflicting information about whether it's required, but should FinCEN decide it should have been reported and you didn't do it, you will have a problem on your hands that could have easily been avoided.
Q7: How do you file FinCEN 114?
A7: The FinCEN 114 (FBAR) must be electronically filed. It can be filed through your software if it has that capability, or directly at the BSA E-filing System: https://bsaefiling.fincen.treas.gov/main.html
Q8: Is there relief for newer tax preparers if they mistakenly report foreign income for clients?
A8: I believe the question you are asking is if you as the tax preparer didn't properly report your client's foreign accounts. If the omission wasn't willful by you or the client, you may be able to use one of the amnesty-type programs such as Streamlined Foreign Offshore, Streamlined Domestic Offshore, Delinquent Information Returns Procedures, etc. depending on where the client resided, if the income was also not reported on the tax return, etc. In certain cases, a letter citing reasonable cause may work. In my opinion, you should work with a more experienced tax professional to clean up the mess and minimize exposure.
However, if the client knew the accounts should have been reported, the client should be referred to criminal attorney with experience in international taxation. You can work with the attorney under a Kovel letter to have protection, but willful omissions will disqualify your client for any of the Streamlined programs available. Your taxpayer can still voluntarily disclose, but in my opinion, an attorney should be involved.
Q9: You said that you have to report PayPal and mortgage foreign accounts. Did I understand you correctly?
(similar question) Can you please elaborate about foreign mortgage accounts? What form(s) are they reported on?
A9: PayPal accounts not in the United States are foreign accounts and should be reported. FATCA requires contracts to be reported, and a mortgage is a contract.
Q10: If a person is a resident under the substantial presence test, but less than 183 days in the current year, and closer connection under 301.7702(b)-2 applies, would that person have to file FBAR, FATCA, etc.)?
A10: If a taxpayer is deemed a nonresident alien because of the closer connection exemption, then no FBAR or FATCA fiing would be required as those forms are for resident aliens and citizens only (and those who make an election to be taxed as a resident alien).
Q11: What happens if Schedule B is under the filing threshold?
A11: If the answer to ANY of the questions in Part III on Schedule B is "yes", Schedule B must be filed.
Per the IRS:
Use Schedule B (Form 1040) if any of the following applies:
You had over $1,500 of taxable interest or ordinary dividends.
You received interest from a seller-financed mortgage and the buyer used the property as a personal residence.
You have accrued interest from a bond.
You are reporting original issue discount (OID) in an amount less than the amount shown on Form 1099-OID.
You are reducing your interest income on a bond by the amount of amortizable bond premium.
You are claiming the exclusion of interest from series EE or I U.S. savings bonds issued after 1989.
You received interest or ordinary dividends as a nominee.
You had a financial interest in, or signature authority over, a financial account in a foreign country or you received a distribution from, or were a grantor of, or transferor to, a foreign trust.
Q12: My software doesn't have the forms you are talking about. Therefore, I don't have the filing requirement, right?
A12: WRONG!!! You are required to file these forms for your clients whether or not they are included in your software. If you are working with clients that require FBAR, FATCA, etc., you have a few choices - get a more professional software package, file the FBAR at the BSA filing website, download the FATCA forms from the IRS and make sure you can attach and upload them with your electronic filing, send the client to a different tax professional, etc. But you can NEVER omit them because they are not included in your software package.
Q13: Are FBAR penalties the same for Form 8938?
A13: No, they both have separate penalties, even though in many cases the same exact information is being reported. The FBAR penalties depend on whether the omission is willful, and vary depending on a number of factors. The Form 8938 penalty is $10,000 for failure to file by the due date of the tax return, including extensions, or for failing an incomplete or inaccurate Form 8938.
Penalties can be waived if the taxpayer can show reasonable cause for not reporting an asset.
Q14: What if you have stocks in a foreign business that you do not have access until the parent dies? But it has the taxpayer's name as owner of the company.
A14: Signature authority over or a financial interest in an account requires a filing of the FBAR (and FATCA as well as some other necessary reporting), depending on the value of the stocks. As the owner, the taxpayer may be able to move money with the financial institution. Depending on the taxpayer's involvement in a foreign business (officer, director, shareholder), there may be other required forms (Form 5471, etc.). You need to ask more questions and do more research.
Q15: What if you have a POA for a parent, and that parent holds a foreign account?
A15: It's the responsibility of the taxpayer to file. As a representative, you "step into the shoes of the taxpayer", so you need to get the necessary information and include it in any tax filings.
Q15: What is the difference between FBAR and FATCA?
A15: We could talk about this for months! Here's a very useful comparison of FBAR and FATCA, courtesy of the IRS: https://www.irs.gov/businesses/comparison-of-form-8938-and-fbar-requirements
Q16: If an account is opened in a multi-country bank such as Bank of America, is that a foreign account if it was opened in a foreign country? What if it was opened in the U.S., but there were foreign transactions?
A16: If the financial institution is outside the U.S., it's a foreign account. Even if it has U.S. branches, if you did not open it in the U.S., it's not a U.S. account.
If the account was opened in the U.S., it's a U.S. account, regardless of whether or not there are foreign holdings. For example, if the client opens a Vanguard account with the U.S. and has foreign stocks and/or mutual funds, it is not a foreign account because the financial institution is in the United States.
Q17: Should you file a zero value in the FBAR or Form 8938 in the year following closing of your foreign accounts to close the record?
A17: If the account was never open during the tax year, then no, it should not be reported. Closed accounts are not reported in the tax year after they are closed. In the year that it was actually closed, it must be reported, even if the account was not in existence on 12/31 during the tax year.
Q18: Are land or real property reportable on Form 8938?
A18: Foreign real estate held directly is not report on Form 8938. If property is held in an entity, then yes, reporting is required because the entity is a specified foreign financial asset and its maximum value includeds the value of the real estate.
Q19: For FBAR and Form 8938, do we need to determine the month of highest value?
A19: It is not the month. It is the highest value of each separate account between January 1st and December 31st of the tax year.
Q20: Are all PayPal accounts foreign accounts?
A20: No. Accounts opened overseas (PayPal UK, PayPal Australia) are foreign accounts. PayPal accounts opened in the U.S. are not foreign accounts.
Q21: If after educating a client and filings are required, should prior years also be filed?
A21: Most definitely! Catch the mistakes before the IRS does! See if your client qualifies to participate in any of the Streamlined Programs, or the Delinquent International Information Return Submission procedures. "Silent disclosure" (just filing and hoping the IRS doesn't pick up on it and penalize) is dangerous and you may need to consult an attorney first to see if that's your best option. We have heard of many instances where the IRS will automatically assess penalties on silent disclosures, so silent disclosure isn't always the best option. You will want to consult with an experienced international attorney before you do this.
Q22: If the client has 3 foreign accounts - each one less than$10,000 - in aggregate they are $11,000. Does the client need to efile an FBAR?
A22: Yes! The requirement is for all accounts in aggregate exceeding $10,000 USD, using the year end Treasury conversion rate.
Q23: Client is the beneficiary of a family trust. Cannot take money without trustee's authority. Is that reportable as a foreign account?
A23: The taxpayer has an interest in foreign trust. This should be reported on FATCA (Form 8938), and possibly on an FBAR (if there is sufficient ownership or beneficial interest). There also may be Form 3520 and Form 3520A reporting as well.
There can be some exceptions, so research is required.
Q24: Canadian citizen moved to the U.S. for work in 2017. Company paid accounting firm to prepare 2018 Income tax return and told individual that is date of US citizenship. Individual obtained a SSN, has Canadian bank accounts with dividend/interest income. What are the filing requirements for the FBAR?
A24: I believe you mean the date of residency, not citizenship. You don't become a U.S. citizen merely by moving here. If the taxpayer was not substantially present in 2017, then s/he would file as a non-resident and no FBAR would be required. If the taxpayer was in the U.S. for all of 2018, then the taxpayer would be a resident alien, and FBAR reporting as well as the reporting of worldwide income would be required.
Q25: I have a friend whose parents (residents and citizens of France) come for a 3 month visit. They would need to file an FBAR, correct?
A25: If they are non-resident aliens, and do not pass the substantial presence test (you have to properly count the actual days of presence (refer to the slides in my CPA Academy presentation), then no, they do not have an FBAR filing requirement.
Stay tuned for new webinars in 2020. We've only scratched the surface in talking about foreign financial accounts. I'll be doing a deeper dive into this important subject soon.
Is there a particular subject you would like me to do a webinar on? Please share this with me by emailing my team at support@TaxSmartTraining.com.
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