U.S. taxpayers who own foreign assets and investments often face confusion about their requirements when filing taxes and reporting information to the IRS. In general, taxpayers must file a Foreign Bank and Financial Account Report (FBAR) on an annual basis, and they must include information about all accounts or other assets owned outside the United States. Failure to file FBARs can result in steep penalties. Until recently, there was some confusion about how penalties were applied in certain situations. However, a recent Supreme Court ruling has cleared up this issue and provided some understanding of the potential penalties in certain cases.

Bittner v. United States

In the case of Bittner v. United States, the defendant was charged with failing to report foreign accounts to the IRS between 2007 and 2011. The question was whether the penalties that would apply should be based on the number of reports that were not filed or the number of accounts that were not reported. A maximum $10,000 penalty may be applied for each violation, and initially, the IRS imposed a total penalty of $2.72 million based on the number of accounts that were not reported between 2007 and 2011. The defendant challenged this decision, and the fine was reduced to $50,000, or $10,000 for each year that he did not report his assets correctly. An appeals court reversed the ruling, and the defendant then appealed the case to the Supreme Court.

After review, the majority of the Supreme Court justices ruled that FBAR penalties should be issued on a per-report basis rather than a separate penalty being assessed for each account that was not reported. In the majority opinion, Justice Neil Gorsuch stated that the laws addressing this issue state that a person has a duty to file reports to the IRS, without discussing specific accounts or the number of accounts listed. While the law does allow for penalties to be assessed on a per-account basis for willful violations, the failure of the law to specify how penalties should apply for non-willful violations means that a single penalty will apply for the failure to file a report, regardless of the number of accounts that should have been reported.

The rise of virtual currencies such as Bitcoin and Ethereum has created a new world of digital assets, which have become increasingly popular with investors in recent years. But while there are numerous potential benefits of investing in cryptocurrency, the tax laws that apply to owning, selling, or trading these assets can sometimes be unclear for many. During the 2023 tax season, taxpayers may be wondering how their cryptocurrency or other digital asset investments will be addressed on their tax returns. Fortunately, the IRS has provided guidance on these issues, ensuring that crypto earnings can be reported correctly while maintaining compliance with IRS regulations.

Reporting Digital Assets on Tax Returns

For tax year 2021, a question was added to the 1040 tax return form asking taxpayers if they received, sold, or exchanged cryptocurrency during that year. This question has been included on tax returns for 2022 as well, although it has been updated to refer to "digital assets." According to the IRS, digital assets include cryptocurrencies and virtual currencies that can be converted to money or other assets, as well as "stablecoins," which are cryptocurrencies that have been tied to the value of other commodities or financial instruments in order to avoid fluctuations in value. Digital assets also include non-fungible tokens (NFTs).

While people who have engaged in cryptocurrency transactions will be required to report these transactions on their tax returns, there are other situations where digital assets must be reported, including:

The Foreign Bank and Financial Account Report, which is usually referred to as the FBAR, is an important tax filing requirement for U.S. citizens and residents who have foreign financial accounts. If you fail to file an FBAR when required, this can result in hefty fines and penalties from the IRS. Missing the deadline can lead to serious consequences, and taxpayers will need to understand the available options in these situations.

Understanding FBAR Requirements

The FBAR filing requirement applies to taxpayers who have a financial interest in or signature authority over one or more accounts at a foreign financial institution outside the United States. If the aggregate value of all foreign accounts owned by a taxpayer exceeds $10,000 at any point during a tax year, an FBAR must be filed. Eligible taxpayers include individual U.S. citizens or residents of the United States, as well as LLCs, business partnerships, trusts, and estates. Foreign accounts that must be reported include bank accounts, retirement accounts, brokerage accounts, as well as accounts for trading in precious metals or gems and other types of foreign financial assets.

Addressing Delinquent FBARs

An FBAR for a tax year is due on April 15 of the following year. That is, if you owned foreign financial accounts that had a total aggregate value of at least $10,000 at any point during the calendar year 2022, you will be required to file an FBAR by April 15, 2023. However if you miss this deadline, an automatic extension will be granted, and an FBAR may be submitted before October 15. You may submit the FBAR at any time before this date without the need to request an extension. All FBARs must be filed electronically on the Financial Crimes Enforcement Network (FinCEN) website.

 Retirement accounts such as 401Ks and IRAs are a great way to save for the future and help protect your financial security. When you contribute money to these accounts, it grows over time, and in most cases, you will not have to pay taxes until you withdraw the funds. This can provide tremendous benefits, such as tax-free compounding of your investments and significant savings when you retire. However, there may be times when you may need to access money in retirement accounts early due to unforeseen circumstances or emergencies. Early withdrawals can result in significant penalties, and taxes will typically apply. Fortunately, with the recent passage of the SECURE 2.0 Act, some exceptions have been made that allow individuals to make withdrawals from their retirement accounts without incurring excise taxes or penalties in certain circumstances.

New Exceptions to the Excise Tax on Early Retirement Account Withdrawals

Typically, a 10 percent excise tax will apply to distributions from a retirement plan that occur before the account holder reaches the age of 59 1/2. However the SECURE 2.0 Act, which was passed by Congress in December 2022, provides some exceptions to the excise tax, including:

• Birth and adoption expenses - Distributions may be made from a retirement plan to address qualified expenses related to the birth or adoption of a child. These distributions can be repaid to make up for the amount that was withdrawn. However since tax refunds are generally not available for contributions made after a certain amount of time, the new law has limited the recontribution period to 3 years.

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Taxpayers with foreign assets must take extra care when filing their annual tax returns and reporting information to the IRS through other means. By law, taxpayers with foreign accounts are required to report these assets and pay any applicable taxes. Failure to report accounts or other assets when required could result in tax penalties. By understanding the specific requirements that apply to them, taxpayers can avoid tax-related issues, and they can determine the steps to take to respond to any penalties that have been assessed.

The Basics of Foreign Account Reporting

When it comes to reporting foreign financial accounts, there are two main forms that taxpayers should be familiar with: the Report of Foreign Bank and Financial Accounts (FBAR) and Form 8938. The FBAR is used to report the value of a taxpayer’s foreign bank and financial accounts in total at the end of a tax year. A taxpayer will be required to file an FBAR if they have an interest in one or more bank accounts, brokerage accounts, mutual funds, or other financial accounts in countries other than the United States, as long as the aggregate value of all of these accounts exceeds $10,000 at any time during the calendar year. FBARs are filed electronically with the Financial Crimes Enforcement Network (FinCEN), and they are due on April 15.

Form 8938 is used for reporting certain specified foreign financial assets when the aggregate value of all such assets exceeds a certain threshold amount. In addition to foreign financial accounts, Form 8938 will include stocks and securities issued by foreign entities and ownership interests in foreign businesses. The following reporting thresholds apply for Form 8938: