Foreign Investment Accounts - Beware of Penalties


Question: I remember reading your column last year about a new tax law that went into effect regarding foreign investment accounts.  Could you please repeat it?  I have investments in international mutual funds.  Does this law apply to me?  Do you think this new law will hurt the stock market?

Answer:  I first wrote this column last year and am rerunning it now because the reporting deadline for foreign accounts is next week, on June 30th.  If you own any foreign bank or investment accounts you should already be talking to your tax professional.  If you haven’t been reporting them properly you may need an attorney who specializes in reporting foreign accounts.  Here are the facts:

  • Congress passed the Foreign Account Tax Compliance Act (FATCA) in 2010.  According to a Wall Street Journal report last year, FATCA coerced more than 77,000 foreign banks and financial firms to report data on U.S. accounts with values of $50,000 or higher, effective July 1, 2014.  If you have a foreign account, odds are the IRS will know about it.

  • Some foreign financial firms are raising their minimum account size to over $1 million and others are dropping their U.S. customers altogether.

  • Penalties for willfully failing to report foreign accounts can be as high as the greater of $100,000 or 50% of the highest account value each year, so your penalty could easily exceed your account value. For example, say you have a joint account at a foreign bank with your brother, who lives in the country where the account is.  And say the account’s highest value (including his half) in each of the last three years was $100,000.  Your penalty could be $150,000--$50,000 for each of the three years.

  • You must report accounts that you have power over, like trust accounts, as well as personal accounts.

  • If your foreign account aggregate holdings exceed $10,000 at any time during the year you must file an annual Foreign Bank Account Report (FinCEN Form 114) with the Department of the Treasury by June 30th.

  • If your foreign accounts are worth more than $50,000 ($100,000 if married filing jointly) on the last day of the tax year or $75,000 ($150,000 if married filing jointly) at any time during the tax year you must file IRS Form 8938 with your Form 1040 individual tax return. Failure to file Form 8938 could cost you up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after an IRS notice of failure to disclose up to a maximum of $60,000.  Criminal penalties may also apply.

  • U.S. mutual funds that hold foreign investments are not considered to be foreign accounts.  However, U.S. taxpayers who own offshore mutual funds must file IRS Form 8621.

It remains to be seen what if any unintended consequences will spring from this new law, but it is unlikely to affect stock prices.  Last year, Brian Wesbury, chief economist for First Trust, said the rumors that FATCA could collapse the dollar and our financial system is “just the latest in a never-ending stream of politically-based fear-mongering during this, now, five-year bull market” and “The real truth about all these scare stories was that none of them were based on economics.”

Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment advisor and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning.  Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to