Taxes for Foreign Missionaries: Foreign Bank and Financial Account Reporting

http://blogs.ocweekly.com/navelgazing/church_money.250w.tn.jpgForeign missionaries often maintain accounts with foreign banks or other financial institutions. Sometimes they maintain a working fund in a local bank. Sometimes it’s just a family bank account. Or maybe it’s an account for a church or charity that hasn’t been formally incorporated.

The IRS requires that all such accounts be reported to the IRS using an “FBAR” if the account holds more than US$10,000.

If you own or have authority over a foreign financial account, including a bank account, brokerage account, mutual fund, unit trust, or other types of financial accounts, you may be required to report the account yearly to the Internal Revenue Service. Under the Bank Secrecy Act, each United States person must file a Report of Foreign Bank and Financial Accounts (FBAR), if

  1. The person has a financial interest in, or signature authority (or other authority that is comparable to signature authority) over one or more accounts in a foreign country and
  2. The aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.

The FBAR is required because foreign financial institutions may not be subject to the same reporting requirements as domestic financial institutions. The FBAR is a tool to help the United States government identify persons who may be using foreign financial accounts to circumvent United States law. Investigators use FBARs to help identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad.

The taxpayer must note the presence of the account on his personal Form 1040 as well as filing the FBAR

A person who holds a foreign financial account may have a reporting obligation even though the account produces no taxable income. Checking the appropriate block on FBAR-related federal income tax return questions (found on Form 1040 of Schedule B, the “Other Information” section of Form 1041, Schedule B of Form 1065, and Schedule N of Form 1120) and filing Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, satisfies the account holder’s reporting obligation.

The FBAR is not to be filed with the filer’s Federal income tax return. The granting, by the IRS, of an extension to file Federal income tax returns does not extend the due date for filing an FBAR. You may not request an extension for filing the FBAR. The FBAR must be received by the IRS on or before June 30 of the following year.

Now, the IRS and US Treasury Department are pursuing offshore bank accounts with a vengeance — and they are pursuing criminal penalties for willful violations. An amnestry program was in effect until late 2009, and amnesty is no longer automatically available for taxpayers who failed to make the proper filings. However, the IRS says,

Q. What happens if an account holder is required to file an FBAR and fails to do so?

A. Failure to file an FBAR when required to do so may potentially result in civil penalties, criminal penalties or both. If you learn you were required to file FBARs for earlier years, you should file the delinquent FBAR reports and attach a statement explaining why the reports are filed late. No penalty will be asserted if the IRS determines that the late filings were due to reasonable cause. Keep copies of what you send for your records.

I think it’s unlikely that the IRS would pursue criminal sanctions for someone who was otherwise a compliant taxpayer. And, of course, most missionaries who failed to report a foreign account aren’t hiding income from the US, as the account is either a non-interest bearing household or working fund or else the missionary owes no income tax due to a tax treaty combined with the standard deduction, housing allowance, and foreign earned income exclusion.

The missionary with the greatest risk of prosecution or severe penalties would be the missionary who is avoiding US taxes by not disclosing the foreign account.

The IRS further advises –

The Voluntary Disclosure Practice is a longstanding practice of IRS Criminal Investigation of taking timely, accurate, and complete voluntary disclosures into account in deciding whether to recommend to the Department of Justice that a taxpayer be criminally prosecuted. It enables noncompliant taxpayers to resolve their tax liabilities and minimize their chances of criminal prosecution. When a taxpayer truthfully, timely and completely complies with all provisions of the Voluntary Disclosure Practice, the IRS will not recommend criminal prosecution to the Department of Justice.

Although the use of special voluntary disclosures by taxpayers with unreported income from offshore accounts expired on Oct. 15, 2009, noncompliant taxpayers can still use the VDP to resolve their tax liabilities. A voluntary disclosure is made by following the procedures described in I.R.M. 9.5.11.9. Tax professionals or individuals who want to initiate a voluntary disclosure should call their local CI office. Taxpayers with questions may call the IRS Voluntary Disclosure Hotline at 215-516-4777, visit www.irs.gov or contact their nearest CI office.

In other words, if a missionary has failed to make necessary filings in the past, he or she should work with a qualified tax professional to resolve the issue. If the missionary voluntarily catches up the filings and pays whatever taxes are due, the IRS may assess civil penalties and interest, but criminal prosecution is unlikely. However, if the IRS discovers the account and finds that the missionary has not filed reports or paid income taxes due, the IRS may well pursue criminal prosecution.

In other words, you want to voluntarily come forward. You don’t want to get caught with an unreported account.

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