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Global US Taxpayers Must Plan Carefully to Comply With FBAR

Nov. 29, 2023

Financial reporting rules that combat tax evasion can lead to major consequences for noncompliance, says Arielle Tucker of Connected Financial Planning. She shares steps taxpayers can take to stay compliant.

The US must recognize the diverse situations of its taxpayers and work toward a system that fosters compliance without unduly burdening them. Making US reporting requirements more accessible to taxpayers, streamlining processes, and strengthening oversight mechanisms will be key to achieving this balance.

This need was made clear following a Senate Finance Committee report earlier this year that exposed Credit Suisse Group for aiding and abetting wealthy Americans with hiding income from the IRS. The report highlighted unfiled Reports of Foreign Bank and Financial Accounts. While an FBAR is simple to file, it carries punitive consequences for non-compliance.

Senate Finance Chair Ron Wyden (D-Ore.) has called for more scrutiny of foreign bank accounts held by US-based taxpayers, as well as closing the loopholes that facilitated this historic case.

The cries for extra scrutiny ring hollow, however, when we consider the everyday US taxpayers it also implicates—most of who have legitimate reasons for holding assets in foreign financial institutions, or FFIs.

Systemic Challenges
By its very nature, FBAR places suspicion on US taxpayers with accounts at FFIs. The foreign financial holdings threshold that triggers the filing requirement is both low and difficult to understand for the average taxpayer, suggesting it’s designed to coerce self-reporting even when filing an FBAR isn’t technically necessary.

The globally mobile families advised by certified cross-border tax and financial professionals often have strong personal and professional ties to foreign countries because those places are home. So the desire to keep ties to what the IRS classifies as an FFI is often as practical as it is personal.

These globally mobile families most times simply wish to avoid the chore of closing and reestablishing relationships with their home financial institutions. Attempting to reestablish those links after becoming liable for US taxation can be impossible due to the same Foreign Account Tax Compliance Act or FBAR legislation. It’s a Catch-22.

Many US taxpayers, including those with family ties or dual citizenship in other countries, hold foreign accounts for familial or diversification reasons. But the insufficient understanding of complex US tax regulations, especially the FBAR requirements, is a major challenge. This lack of awareness frequently results in penalties rather than guidance.

Proactive Planning
Navigating the complexities of US tax obligations as a globally mobile family with ties to an FFI requires careful planning and proactive communication. Here are some key tips for families preparing to become US persons with an FFI:

Contact your FFI in advance. Reach out before your relocation about your upcoming ties to the US tax system. Understand the specific policies of your bank for maintaining accounts for US persons. Some institutions may allow you to keep your account with certain conditions, such as paying a nonresident account fee.

More than 100 countries have signed the FATCA to identify non-US financial accounts opened by US persons. Even if you didn’t self-report or inform your FFI that you’re now a US taxpayer, your information may already have been shared between the US and FFI.

Review global financial holdings with your US adviser. Schedule a comprehensive review of your global financial holdings with a US-based international taxation specialist before becoming a US taxpayer.

Follow US tax regulations for both income and disclosure reporting, considering the worldwide reporting requirement. Also, preemptively assess the tax implications of your global assets to avoid bringing assets into the US tax system that may be subject to punitive taxation.

Consider the impact on tax and financial planning. Recognize that becoming a US taxpayer changes your financial planning landscape. What may make sense for your foreign advisers, business partners, and family abroad may cease to apply to you. Be aware that US tax regulations may limit certain planning opportunities only possible prior to becoming a US taxpayer.

While sensationalizing the exploits of the ultra-rich creates excellent soundbites, a more measured response would better serve both US tax evasion efforts and US taxpayers.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information
Arielle Tucker is founder and CEO of Connected Financial Planning. She provides personalized financial guidance to US citizens and their families moving to or living between the US and Europe.

[Bloomberg Law]

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