What Are the Offshore Disclosure Requirements for the 2023 Tax Year?
December 29, 2023
Taxpayers who own qualifying offshore accounts and other foreign financial assets have an obligation to disclose these assets to the federal government on an annual basis. As we move into 2024, it is important for high-income and high-net-worth taxpayers to ensure that they have a clear understanding of their reporting obligations for the 2023 tax year.
The obligation to disclose foreign financial assets exists under two federal statutes—the Bank Secrecy Act (BSA) and the Foreign Account Tax Compliance Act (FATCA). Each of these statutes applies in different circumstances, imposes different requirements and establishes different penalties for non-compliance.
Disclosing Foreign Financial Assets Under FATCA (IRS Form 8938)
The Foreign Account Tax Compliance Act requires that taxpayers disclose their “foreign financial assets” to the Internal Revenue Service (IRS) using IRS Form 8938, provided that the aggregate value of these assets exceeds the applicable threshold. For the 2023 tax year, the reporting thresholds are:
- Unmarried Individuals Living in the U.S.: Total value of $50,000 on the last day of the 2023 tax year, or more than $75,000 at any time during the tax year.
- Married Individuals Living in the U.S. and Filing Jointly: Total value of $100,000 on the last day of the 2023 tax year, or more than $150,000 at any time during the tax year.
- Unmarried Individuals Living Outside the U.S.: Total value of $200,000 on the last day of the 2023 tax year, or more than $300,000 at any time during the tax year.
- Married Individuals Living Outside the U.S. and Filing Jointly: Total value of $400,000 on the last day of the 2023 tax year, or more than $600,000 at any time during the tax year.
- Domestic Business Entities: Total value of $50,000 on the last day of the 2023 tax year or more than $75,000 at any time during the tax year.
“Foreign financial assets” under FATCA include offshore bank accounts (which are also covered under the BSA), as well as other “non-account assets held for investment.” Examples include, but are not limited to, stocks in foreign companies and other foreign securities, other interests in foreign entities and trusts, and contracts with foreign parties. However, in some cases, if a taxpayer reports these assets on another tax form, then the taxpayer does not also need to report them on IRS Form 8938.
To comply with FATCA, taxpayers must report the maximum value of their foreign financial assets during the 2023 tax year. For foreign currency, taxpayers must convert to U.S. dollars using the end-of-year exchange rate. For non-currency assets, taxpayers must report the fair market value as calculated in accordance with IRS Form 8938’s instructions.
Disclosing Foreign Financial Accounts Under the BSA (FBAR)
While FATCA requires disclosure of all qualifying “foreign financial assets,” the BSA only requires disclosure of qualifying “foreign financial accounts.” If the aggregate value of a U.S. taxpayer’s offshore accounts exceeds $10,000 at any time during the calendar year, then disclosure is required. Since this is much lower than all of the thresholds under FATCA, taxpayers may have an obligation to disclose their offshore accounts under the BSA even if they aren’t required to file IRS Form 8938. Similar to FATCA, the BSA requires that taxpayers convert the value of their offshore accounts to U.S. dollars using the exchange rate on December 31, 2023.
Under the BSA, U.S. taxpayers must disclose all qualifying foreign financial accounts in which they “have an interest.” This can mean any of the following:
- The taxpayer is the owner of record or holder of legal title;
- The taxpayer’s agent or representative is the owner of record or holder of legal title;
- The taxpayer has a “sufficient interest” in the entity that is the owner of record or holder of legal title; or,
- The taxpayer has the authority to control the disposition of assets in the account by direct communication with the financial institution at which the account is maintained.
Complying with the BSA involves filing a Report of Foreign Bank and Financial Accounts (FBAR) with the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN). FBARs are due to FinCEN on April 15 (which is also Tax Day in 2024), though all taxpayers receive an automatic six-month extension.
What if You Are Behind on Your FATCA or FBAR Filings Heading Into 2024?
That covers the basic offshore disclosure requirements for the 2023 tax year. Now, what if you are behind on your FACTA or FBAR filings heading into 2024?
Failing to file IRS Form 8938 or an FBAR can pose serious risks. FACTA imposes a civil penalty of $10,000 for failure to disclose (plus additional penalties if the IRS issues a notice of nondisclosure). Under the BSA, non-willful violations carry a civil penalty in excess of $13,000 (as of 2023), while willful violations carry a civil penalty of approximately $150,000 or 50 percent of the aggregate account value, whichever is greater.
However, violations of FATCA and the BSA can also lead to criminal prosecution in some cases. If charged criminally, U.S. taxpayers can face six-figure fines for each individual violation plus possible prison time.
Resolving past offshore disclosure violations requires a careful and strategic approach. Generally speaking, submitting previous years’ disclosures in a current filing (referred to as a “quiet disclosure”) is disfavored. In some cases, submitting a voluntary disclosure to IRS Criminal Investigation (IRS CI) may be necessary. However, this carries risks as well, and it is only an option if the IRS has not already initiated an audit or investigation. With that said, a proactive approach to resolving federal tax controversies is almost always best, so taxpayers who have concerns about their offshore disclosures (or lack thereof) should consult with experienced tax counsel promptly.
Request a Consultation with a Federal Tax Lawyer at Brown Tax, P.C.
If you need to know more about the risks associated with failing to disclose foreign financial assets to the IRS or FinCEN, we invite you to get in touch. To request a consultation with a federal tax lawyer at Brown Tax P.C., please call 888-870-0025 or contact us confidentially online today.