Foreign Account Reporting Requirements (FBAR)

U.S. citizens and residents with a financial interest in or signature or other authority over any foreign financial account need to report that relationship by filing FinCEN Form 114 if the aggregate value of the accounts exceeds $10,000 at any time during 2016. Failure to file can result in draconian penalties.

CAUTION: Prior to 2016, the Form 114 was not required until the end of June. That due date has been moved up to April 18, 2017 for 2016 reporting. Previously there was no filing extension allowed, but the law that changed the filing date also gave FinCEN the authority to provide a six-month extension. FinCEN announced that an extension to October 16, 2017 will be automatic for anyone who was required to file Form 114 by April 18, 2017 but failed to do so.

Keep in mind that “financial account” includes securities, brokerage, savings, checking, deposit, time deposit, or other accounts at a financial institution. Commodity futures and options accounts, mutual funds, and even non-monetary assets such as gold are also included. It becomes a “foreign financial account” if the financial institution is located in a foreign country. If you own shares of a foreign stock or a mutual fund that invests in foreign stocks, and the stock or fund is held in an account at a financial institution or brokerage located in the U.S., this is not considered a foreign financial account, and the FBAR rules don’t apply to it. An account maintained with the branch of a foreign bank physically located in the U.S. also is not a foreign financial account.

You may have an FBAR requirement and not even realize it. For instance, perhaps you have relatives residing in a foreign county and they have put you on their bank account in case something happens to them. If the value of the account exceeds $10,000 at any time during the year, you will need to file the FBAR. Or if you are gambling on the Internet, that online casino may be located in a foreign country, and if your account exceeds the $10,000 limit at any time during the year, you will have an FBAR reporting requirement.

You may also have an additional requirement to file Form 8938, which is similar to the FBAR requirement but applies to a wider range of foreign assets with a higher dollar threshold. If you are married filing jointly, you must file Form 8938 if the value of certain financial assets exceeds $100,000 at the end of the year or $150,000 at any time during the year. If you live abroad, the thresholds are $400,000 and $600,000, respectively. For other filing statuses, the thresholds are half of those amounts. The penalty for failing to file the 8938 is $10,000 per year, and if the failure continues for more than 90 days after you receive an IRS notice of failure to file, the penalty can go as high $50,000.

As you can see, not complying with the foreign account reporting requirements can have some very nasty repercussions. Please call this office with questions or if you need assistance in meeting your foreign account reporting obligations.

Health Reimbursement Arrangements Approved For Qualified Small Employers

Under the Affordable Care Act (ACA or Obamacare), a health reimbursement arrangement (HRA) is treated as a group health plan, and as such, it has to meet all of the ACA’s market-reform requirements, which is not possible for the typical HRA. Stand-alone HRAs do not meet two key requirements of the ACA in that they:

  • Limit annual dollar benefits for the insured and
  • Fail to provide certain preventive-care services without cost-sharing requirements.

Previously, under the IRS’s interpretation of the ACA law, employers who offered stand-alone HRAs were subject to a draconian excise tax penalty of $100 per day per employee (maximum: $36,500 per year). That is a chilling penalty for any small employer, and it caused most of them to back away from offering any sort of health coverage for their employees.

To alleviate this problem, Congress passed the 21st Century Cures Act, which is generally effective beginning in 2017, and which created a “qualified small-employer HRA” that is not treated as a group health plan for income tax purposes. Thus, a qualified small-employer HRA will not face the $100 per day excise tax that is levied on group health plans that don’t meet the ACA’s market reform requirements.

To qualify as a small-employer HRA, a plan must meet the following requirements:

  1. An eligible employer maintains it. An eligible employer is one that employs fewer than 50 employees (in full-time equivalents) and that does not offer a group health plan to any of its employees.
  2. The HRA is provided on the same terms to all eligible employees except:
    • Those who have not completed 90 days of service,
    • Those under the age of 25,
    • Part-time workers (generally those working an average of fewer than 30 hours per week),
    • Seasonal workers (generally those employed for 6 months or fewer during the year),
    • Employees covered by a collective bargaining unit, and
    • Certain nonresident aliens.
  3. The HRA is funded solely by an eligible employer, with no salary-reduction contributions.
  4. The HRA only reimburses the employees after being provided with proof of their medical expenses.
  5. The HRA limits reimbursements to $4,950 (or $10,000 if the plan includes family members) per year. Amounts are subject to inflation adjustments for years after 2016. For employees who are covered for less than a full year, the dollar limits are prorated.An employee’s premium tax credit is reduced for any coverage month when the employee is provided with a qualifying HRA. To prevent “double dipping,” if the employee purchases health insurance through the Marketplace, that employee is required to notify the Marketplace of his or her permitted benefit for the year under the HRA.

Partners in a partnership or limited liability company (LLC) or owners and officers with greater than a 2% share of a Subchapter S corporation must treat any reimbursement under an HRA plan as taxable income, and may then deduct as an above-the-line deduction their cost of health insurance that was included in income. For greater than 2% shareholders of a Subchapter S corporation the taxable reimbursements are subject to income tax withholding.

If you have questions related to how your business could use a qualified small-employer HRA, please give this office a call.

Dodging Tax Penalties

Most taxpayers don’t intentionally incur tax penalties, but many who are penalized are simply not aware of the penalties or the impact they can have on their wallet. As tax season approaches, let’s look at some of the more commonly encountered penalties and how they may be avoided.

Underpayment of Estimated Taxes and Withholding – Taxpayers are required to pay their tax liability as they go during the year, either through withholding or by making estimated tax payments. If the taxpayer owes more than $1,000 when filing his or her return for the year, the IRS will assess the underpayment of estimated tax penalty, which is currently 4% of the underpayment computed quarterly. There are “safe harbor” payments that can protect you from this penalty, which include payments in the following amounts: 90% of the current year’s tax liability or 100% (110% for high-income taxpayers) of the prior year’s tax liability. Farmers and fishermen need only prepay 66-2/3% of the current liability or 100% of the prior year’s liability.

Late Paying Penalty – When the tax owed on a return is paid after the unextended due date of the tax return (usually April 15), the taxpayer is subject to a penalty of 1/2% per month (maximum 25%) on the unpaid balance. Taxpayers are frequently caught by this penalty when they need an extension to file their tax return. Many fail to realize that the extension does not include an extension to pay. The only way to avoid or minimize this penalty is to have no or little balance due on the return when it is finally filed. The extension form includes a provision to pay the projected balance owed when filing the extension.

Late Filing Penalty – If the return is filed after the due date, including extensions, a late filing penalty of 4.5% per month (maximum 22.5%) applies. The automatic extended due date for 2016 returns is October 18, 2017, but an extension request form must be filed by the April 2017 due date to qualify. Thus, the penalty would generally apply to 2016 returns filed after October 18, 2017. If the return is over 60 days late, the minimum penalty for failure to file is the lesser of $205 or 100% of the tax shown on the return. While the obvious way to avoid a late filing penalty is to file in a timely fashion, the IRS will consider abating the penalty if it can be proven that there was reasonable cause and no willful neglect for filing late.

Negligence – When underpayment is due to negligence on the part of the taxpayer or when there are errors in tax valuations, 20% of the tax underpayment is charged. This penalty is frequently encountered when the IRS adjusts a filed return due to unreported income or overstated deductions. To reduce the chance that you may be subject to this penalty, be sure you provide all of your W-2s, 1099s, K-1s, etc. for the preparation of your return, complete any organizer that have been requested and ensure that you can substantiate all of the deductions you claim.

Dishonored Check – The penalty for dishonored checks is 2% of the check amount, but if the amount is $1,250 or less, the penalty is the amount of the check or $25, whichever is less. If you don’t have sufficient funds to pay your tax when you file your return, rather than writing a check that you know will bounce, you may be able to arrange an installment payment plan with the IRS. You may still incur late payment charges, but the penalty rate is lower if you are on a payment plan.

Missing ID Number – This penalty of $50 for each missing number is charged when a taxpayer doesn’t provide a required Social Security number (SSN) for him or herself, a dependent or another person on his or her tax return. It is also charged when the taxpayer doesn’t provide his or her SSN to another person or entity when required.

There are more severe penalties not mentioned here that apply to fraudulent actions or claims. In addition to the late filing penalty, it is possible to have some of the other penalties abated for reasonable causes. If you have questions related to the application of any of these penalties, please give this office a call.