The Foreign Service Journal, January-February 2019

THE FOREIGN SERVICE JOURNAL | JANUARY-FEBRUARY 2019 71 to be completed and how to complete them correctly. The pen- alties for mistakes and missing forms can be astronomical. U.S. persons are taxed on their worldwide income. Members of the Foreign Service must report a wide variety of offshore assets and transactions pertaining to offshore activities on specific U.S. reporting forms, even if they are stationed abroad. For example, the Foreign Bank and Financial Accounts Report (FBAR), which is filed separately from the tax return, must be filed by U.S. persons with bank accounts and other report- able offshore financial interests (including some life insurance policies and pensions) that have an aggregate value exceeding $10,000 for any moment during the year. Amisstatement on Schedule B can be used against a taxpayer. Failing to report an account on an FBAR, intentionally or unintentionally, can lead to penalties from $12,459 per account, per year (for conduct that is deemed non-willful) to the greater of $124,588 or 50 percent of account balances per account, per year (for conduct that is deemed willful), along with a host of other criminal penalties up to and including jail time. To make matters worse, FBAR penalties can be greater than the value of the asset. In a similar vein, U.S. persons with ownership or signa- ture authority over a foreign bank account of any value must include this in Part III of Schedule B of Form 1040. This often- overlooked section is critically important and lets the IRS know whether it can expect an FBAR filing for a taxpayer in a given year. Since Form 1040 is signed by the taxpayer under penalty of perjury, a misstatement on this schedule can be used against a taxpayer. Taxpayers with interests in some foreign financial assets must also file Form 8938 if the total value of such assets exceeds the applicable statutory reporting threshold (i.e., for unmarried persons living in the United States, more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year). Errors relating to this form may result in a penalty in excess of $10,000. In addition, the statute of limitations for assessment on a foreign asset report- ing form (including, but not limited to, Form 8938) remains open for three years after the date on which the form is ulti- mately filed. There are also specific reporting forms for taxpayers who: 1) have interests in or engage in transactions with offshore entities, trusts and pensions; 2) have investments in foreign mutual funds; 3) receive substantial gifts from non-U.S. persons; and 4) wish to claim the benefit of a treaty-based return position. Many of these reporting forms must be filed even if they have no impact on tax liability. Taxpayers with foreign assets may want to work with a quali- fied tax professional, experienced in the realm of foreign asset