By Edward R. Jenkins

Editor’s note: This article originally appeared in The Centre Daily Times as an installment of the paper’s Focus on Research column. Focus on Research highlights  research projects and topics being explored across all disciplines at Penn State. Each column features the work of a different researcher.

Foreign Asset and Account Reporting has seen a lot press lately on the issues arising from the U.S. requirements to report ownership of foreign bank accounts, securities accounts and a series of other foreign assets. Some of the world’s wealthiest individuals and companies have been caught up in the Panama Papers incident — the release last week of data from the world’s fourth largest offshore law firm.

But what about the everyday citizen? What is the process someone with foreign assets needs to take in order to stay in line with U.S. requirements? 

Part of the confusion about reporting foreign assets arises from the fact there are two separate reporting regimes. One regime is under the Bank Secrecy Act, while the other regime was enacted within the Internal Revenue Code. The Bank Secrecy Act regime is aimed at capturing money launderers, terrorists and drug lords, while the Internal Revenue Code regime is intended to catch tax evaders.

Let’s talk first about the foreign bank account report, fondly referred to as the “FBAR.” The FBAR is actually the Financial Crimes Enforcement Network Form 114. The law requires U.S. citizens, business entities and permanent residents to submit Form 114 each year if the sum of their foreign bank and securities accounts exceeds $10,000 at any point in time during the tax year. The form is required to be submitted electronically by June 30 of each year for the preceding tax year, with no ability to extend the due date. Beginning in 2017, Calendar 2016 reports will be due April 15 with the chance of a six-month extension. FinCEN delegated administrative responsibilities to its sister organization, the IRS.

Failure to file the FBAR carries very stiff civil and/or criminal penalties. The civil penalties are determined largely by two factors: Did you report the income in your tax return and was the failure to file “willful.” The civil penalties range from the civil, non-willful penalty of $10,000 to as much as the civil willful penalty of 50 percent of the highest balance in all of your foreign accounts for each year of the most recent six tax years. So if you did not file FBARs, you knew you were supposed to file FBARs and you owned a foreign bank account with $1 million in it, the civil penalty can be as heinous as $500,000 per year for six years or $3 million when you are caught by FinCEN.

The criminal penalties are above and beyond the civil penalties and a myriad of other penalties that may apply. The criminal penalties can include an additional fine up to $500,000 and up to 10 years imprisonment. If you are concerned about those penalties, you should consult legal counsel.

While the FBAR regime has been around since the 1970s, the Internal Revenue Code requirement to file a foreign asset disclosure statement on Form 8938 with your tax return has only been around since 2010. That second regime requires reporting of a broader range of foreign assets including the aforementioned bank and securities accounts. However, the definition also includes a wide variety of pretty much any foreign financial asset or contractual right that has a foreign counterparty to the contract. For example, direct ownership of real estate isn’t in the definition of foreign financial asset; but many people own their real estate in a foreign legal entity. That ownership interest is reportable.

That second regime requires completion of IRS Form 8938 with your tax return in each year that the sum of your highest balances/values exceeds $50,000 at any point during the tax year. The good news about this regime is the penalty is only $10,000 for each year you fail to file the form. The penalty can run up to $50,000 if the IRS contacts you and you fail to respond.

Here is the good news: There are a few different voluntary disclosure programs that can help you keep the penalties a little more reasonable. First, if you reported all of the income you earned from foreign assets and you paid all the tax that was due, but you just did not submit the FBAR, all you need to do is file the FBARs and you may be able to avoid all of the penalties in most cases.

If you failed to report the income, pay the tax and you didn’t file the FBARs, but you were not willful, there is the Streamlined Offshore Voluntary Disclosure. In that program, you must file three years of amended returns to report the income and pay the tax, file six years of FBARs and pay interest on the tax plus a penalty of 5 percent of your highest balance in foreign accounts. That’s a sweet deal. The downside is: there is no protection from IRS criminal prosecution if they find evidence or “badges” of fraud in your case.

If you were willful in not filing FBARs — as simple as knowing you were supposed to file the forms — there is another voluntary disclosure program: the 2014 Offshore Voluntary Disclosure. If you were willful, there is a criminal pre-clearance procedure that provides you with protection from criminal prosecution if you qualify. If the IRS accepts you into that program, you file eight years of FBARs, three years of amended returns to report the income and pay the tax; you also pay interest on the tax liability and a penalty of 27.5 percent of your highest balance at any point during the prior years. The penalty jumps to 50 percent of the highest balance if your accounts were on the IRS “bad bank” list published on their website. Those disclosure programs are still a better deal than getting caught.

The IRS is quick to note they do not know how long they will have the voluntary disclosure programs so they emphasize the time is now to come clean. The good news is if you just have a signature authority over an account, your reporting is deferred. A recent notice of proposed rule making indicates FinCEN is contemplating a permanent pass on “signature authority only” filings. The preceding comments are highly summarized, and the rules are complex. So this column is just for educational purposes. If you think foreign asset reporting regimes may apply to you, contact a tax professional as soon as you can.