Q: My agency operates frequent tours to one foreign country. To pay local suppliers such as restaurants and tour bus operators, I have decided to set up a local checking account. I also own a vacation condo unit in the same country. To pay my homeowner's association and utility bills, I want to have a personal checking account at the same local bank. I have heard that I have to report these accounts to the IRS and the Treasury Department. Is that correct? If I don't earn any interest, do I still have to report? Does reporting open me up to an audit? What if I don't file the required reports?A:
You have to file an annual report with the IRS if your company's foreign bank account or your personal account exceeds a certain dollar threshold. It does not matter whether you earn interest.
You also have to file another annual report with the U.S. Treasury Department if your personal or company account exceeds a different threshold. Since the IRS is part of Treasury, these overlapping reports are an outstanding example of needless red tape.
Let's deal with your company's account first. Along with your company's annual IRS tax return, you must file Form 8938, Statement of Specified Foreign Financial Assets, if the total value of your bank account was more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. Since the funds held will probably be in local currency, you have to convert to U.S. dollars, and you have to use the official Treasury exchange rate list in effect as of the last day of the tax year.
Next, your company also has to file FinCEN Form 114 with the Treasury, if the value of the company account exceeds $10,000 at any time during the calendar year. If you have two company accounts, you have to add them together and report both. The deadline for this form is the same as the deadline for the IRS form, but you file it electronically at a Treasury website.
For your personal account for the condo expenses, the laws are even more complicated. If you are single or married filing separately, you have to file the IRS Form 8938 if the total value of your personal account and your company's account combined was more than $50,000 on the last day of the year or more than $75,000 at any time during the year. The thresholds double if you file a joint return.
At the Treasury, you must file your own FinCEN 114 if your personal and company accounts together exceeded the $10,000 threshold at any time during the year. For both government agencies, the accounts need to be combined because you control them both.
According to my research, filing these forms does not increase your chances of being audited. However, if you are already being audited, the IRS might check to see if you filed any required Form 8938s.
The Treasury Department has obtained agreements with 113 countries that now report local bank accounts owned by U.S. citizens and companies, so the IRS can match up these reports with your tax returns to see if you should have filed either or both of the forms. The penalties for noncompliance are very large, and there are even criminal penalties, although these are rare.
This is a complicated area of tax law, so consult a tax attorney or CPA if you have questions.