Be alert! Mind your FBAR
Few people have heard about FBAR filing rules. An oddly named form, TD F 90-22.1, is just for this purpose. FBAR is short for Foreign Bank and Financial Account Reporting, which requires disclosure of financial accounts you have in the foreign countries. Usually you would think it applies to the riches, but it turns out many people are also affected.
How does it work
If you have any financial accounts, such as bank deposit, stock brokerage, mutual fund, or even certain life insurance or annuity policies, at any time during the year with combined value over $10,000, you are required to file TD F 90-22.1 by June 30 of the following year. This applies to almost everyone, including foreign people doing business in the U.S. Failure to file will get you a very hefty penalty or even criminal prosecution.
Traditionally, offshore accounts were used to hide assets from creditors or tax agencies. With our global economy, it is very normal to conduct business or invest across the country lines, and it is not unusual for people to have financial connections outside of the US for various reasons. It is okay to have foreign assets or incomes as long as you include them when you do your tax filing.
Little history
The US has a very robust tax system. Our tax laws cover almost every possible direction of money flows and squeeze revenue out of it. Our banks and employers report our financial data diligently or even automatically. This is a very pervasive matrix where you pay taxes as soon as you earn it.
There are no longer geographic barriers for the financial world, but the separation by the laws of different regions still remains. That gives the opportunities for some tax payers to escape the matrix by setting up offshore accounts. This is an old game, and there is even an industry for it. They are the promoters of offshore accounts and the network of foreign banks, including the famous Swiss bank UBS.
New influence
The U.S. government has been catching up. It starts out with a couple laws passed in the 70’s to give power to the Treasury Department to track oversea accounts in fighting illegal drug trafficking. Since 1996, government has been able to get through a few foreign banks to get access to their customer records, including the most recent case of UBS (News Story).
In 2003, a program was launched to give limited amnesty to taxpayers who came forward to declare their foreign financial accounts and any unreported income. Rumor has it that this was just a tactic to allow IRS to gain information about offshore account promoters. Meanwhile, IRS started enforcing the FBAR filing. The program was a huge success for the IRS. It was quoted that $75 million of tax revenue was collected, and hundreds of promoters were identified at report time.
It seems that IRS now gets an upper-hand and finds good ways to expand its influence over the tax frontiers. Many regular tax forms now ask questions about your foreign financial accounts. You should find them in Form 1040, 1120, 1065, and 990. Well, the utmost reporting should be TD F 90-22.1, which is a report you should file as soon as the rule applies.
More to come
With the accumulated database, IRS now can cross check your tax returns and FBAR filings and detect undisclosed incomes. It used to be a way to fight money laundering and terrorists, but now it helps the Treasury Department to uncover big source of government revenue. In March 2009, IRS launched a new six-month Voluntary Disclosure program to chase the hidden income. Therefore, you will see escalation in efforts by the government in this front.
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What others said
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[...] the secrecy of foreign banks, but it eventually cracked it, and now people are facing with tougher FBAR enforcement. With our ever increasing government budget deficits, the money man will have to find a way. [...]