With all the publicity about UBS and foreign bank accounts, I have some concerns that a lot of parents may be sharing…
I know you’re a mom too (though your kids are too young for you to have to worry about this right now!) But, if you were in my shoes, I’m wondering what you’d advise if this were your daughter.
My daughter was studying overseas last year and she had a foreign bank account, not to evade taxes, of course, but just to pay her rent and grocery bills.
Here are the fact of her situation:
In calendar year 2008, the high balance in her foreign bank account never exceeded $7,000. (We’re absolutely sure of this–we’ve poured over all the bank statements and carefully considered all possible relevant exchange rates during the time she had the bank account.)
In calendar year 2009, the high balance in her foreign bank briefly exceeded $10,000 in late January 2009.
My reading of the law is that she will have a FBAR (Foreign Bank Account Report) requirement for 2009, which means she absolutely MUST file TD F 90-22.1 by June 2010. (And, I know that’s an actually “in the hands of the IRS office in Detroit deadline, NOT a postmark deadline–it’s different from most IRS deadlines in that respect.)
However, my understanding of the law was that she did NOT have to file one for 2008, because her bank account stayed well below $10K in 2008.
The penalties for getting this wrong are draconian. I’ve read that the IRS can impose a penalty of $100,000, or one half the value of the account, whichever is greater, per year. Ouch! That’s a LOT of money for a grad student if her mom gives her bad advice, so I wondered what you’d advise.
I keep wondering about 2008, even though her account was several thousand dollars below the filing threshold that year.
I’ve also read that there’s a special amnesty for people who file late reports before September 23 of this year.
We’re absolutely sure that her balance did not come close to $10K in 2008, but do you think it would be safer to file a TD F 90-22.1 this year declaring the high balance of $7K in 2008, by September 23, just to be super-safe? Or would this just be asking for trouble and causing unnecessary work for the IRS? I know they don’t like people filing unnecessary returns, and if every college kid who had a small foreign bank account during a term abroad filed FBARs, it would create a lot of unnecessary work for them, when they’re probably going to be busy dealing with a huge number of people who absolutely DO need to file to catch up–apparently there are people with years of back reporting to catch up on.
For sure, no matter what, I’ll absolutely make sure that she files the TD F 90-22.1 declaring her high water mark for 2009, before June 30 of 2010.
What would you do, if this were your kid? (To be clear, there’s absolutely no effect on her tax liability either way. She didn’t earn any income on her overseas bank account, and she always declares all her income on her tax return, no matter what! After all, she got the tax goddess for a mom. So even though some of her fellowship and academic prize money doesn’t get reported to the IRS on 1098-Ts or 1099’s, she still very dutifully reports it all and pays taxes on it anyway.)
Even if you don’t feel comfortable addressing this question, I think you’d be doing your readers a service by reminding parents of college students who have been studying abroad in recent years about the possibility that their kid might need to file an FBAR. It sounds like the IRS is really cracking down on this stuff, and the IRS says the statute of limitations is 6 years on the FBAR requirement.
This is a great, great question. The IRS has been cracking down on FBAR reqs and otherwise monitoring foreign accounts as part of their targeted enforcement strategy. And, as blogged earlier today re UBS, they now have a very public platform from which to shout.
Setting up a bank account in a foreign country is generally a big deal to the account owner. I remember waiting in line at Lloyd’s in the UK to open my student bank account when I was studying abroad. I felt extremely important dumping what was the equivalent of about $30/month into a foreign account to pay my expenses; I still have a check (I mean, cheque) from my account in my scrap book. But while I felt important, the IRS could care less. The IRS isn’t so much concerned about “small potatoes” taxpayers – and most college students really are “small potatoes” – as they are the Madoffs of the world.
You more or less nailed the FBAR criteria in your question, but here it is again for folks that aren’t aware of it… First of all, FBAR is the Report of Foreign Bank and Financial Accounts which was authorized under the Bank Secrecy Act. You have to file an FBAR if you are a “US person” who owns or has authority (basically, you can control or sign for the account) over a foreign financial account or accounts AND the aggregate total of those accounts exceeds $10,000 at any time during the calendar year. A “US citizen” means a citizen or resident of the United States, or a person in and doing business in the United States. There are a few exceptions, including some for military, but those are really narrow – if you think you qualify for an exception, check with your tax professional.
This is not the same rule as the “Report of Cash Payments Over $10,000 Received in a Trade or Business” – the FBAR only applies to foreign accounts.
The due date for the FBAR is June 30 of the following year (i.e. for 2009, the FBAR would be due on June 30, 2010). It’s important to note that you don’t file the FBAR with your federal income tax return since the due date of the return is NOT the due date of the FBAR. Additionally, getting an extension for your federal income tax return doesn’t extend the due date for the FBAR. This is because there is no extension available for filing the FBAR.
The FBAR is not terribly complicated – it’s mostly long so that you have lots of room to write. To file, you can check the appropriate block on your federal form 1040 at Schedule B and file form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (available here as a pdf).
All of that said, I think you’re right that you should file for 2009 but I say no for 2008.
Since I’m a mom, I understand that you want to be 1000% certain that you’re not doing anything wrong since it involves your daughter. The penalties for failing to comply are indeed draconian and can involve civil and criminal penalties. But if you’re sure that those accounts never topped $10k (which is easy enough to confirm), you’re not required to file and you wouldn’t be subject to penalties. If it were my daughter (who, at the age of 4 advised us that she was planning to move to Paris to study), I would say exactly the same thing.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
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