In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. discusses the IRS rules, specifically FBAR, when you own foreign assets in your IRA.
Foreign bank account reporting and your IRA. This is a serious topic, so listen up. If you have a retirement account and own foreign assets or have a bank account in the name of an IRA or entity that’s owned by your IRA, you need to listen and watch this, because the FBAR rules are no joke, trust me. So, buckle up because I’m going to get through the FBAR Form 8938 rules, which we all need to know about.
So, welcome to another episode of Adam Talks. I’m Adam Bergman, tax attorney and founder of IRA Financial. And if you go through IRS litigation cases, you’ll see a good selection of them are FBAR cases. These are cases the IRS is not messing around with. Okay? This is an area: foreign bank account reporting that is no joke. This is an area the IRS takes super, super, super seriously. Okay?
So, there’s essentially two filings that you need to think about. The FBAR, which is part of a Form 114. That’s where the FBAR gets filed, okay: FinCEN Form 114. And then there’s form 8938, which is a separate form which actually gets attached to your tax return, which brings into question all kinds of potential procedural requirements for how the hell you file this thing. But, before I get started and scare the heck out of everyone, remember this.
If you invest your IRA or 401(k) directly into a foreign asset or if your IRA owns directly a foreign bank account with more than $10,000, there is an exception for IRAs that will not require you to file the FBAR, the Form 8938 and the FBAR form using FinCEN 114. That should give you a great sigh of relief. Because again, and I want to be clear, if your IRA owns the bank account with more than $10,000 directly in the name of the IRA, or if your IRA owns an entity, a foreign entity, has an interest in a foreign asset, and the member, the partner is the IRA, for example, IRA Financial Trust Company, for the benefit of the Adam Bergman IRA. There’s an exception for filing the FBAR or Form 8938, which gets you around the requirement. Okay. So that’s good.
Now you may be saying, okay, what about the LLC? What happens if I have a Self-Directed IRA LLC and my LLC has an interest in a foreign bank account with more than $10,000 or an interest in a foreign asset? How does that work? Well, unfortunately, there’s not a lot of guidance, and I would strongly encourage people to probably file, not probably, file the FinCEN 114, the FBAR 8938. And this is why: it’s all about penalty.
So before we get into the penalties, let’s just kind of briefly talk about the FBAR, which you reported again on the FinCEN Form 114. Essentially, you have to file if you have a financial interest or signature or authority in a financial account outside the US, and if that account is more than $10k in it. Okay? And you don’t need to file obviously, as I mentioned, if you hold an IRA in which you’re the owner or beneficiary, or you have a retirement plan like a 401(k) and you’re the beneficiary. So Solos are good.
The problem is when you get into the LLC world, because there’s no specific exemption for LLCs. So, if your IRA owns a single member LLC, and from a tax standpoint, a single member LLC is disregarded, you may think, well, from a tax standpoint, my IRA owns it, so I should be good. I should be able to avail myself to the exemption,. Problem is, I’m not sure. Okay. And if you’re not sure, then you need to be super careful about penalties. Okay? Because the penalties are no joke, okay? They are super steep. And the IRS, as I mentioned, does not mess around with failure-to-files.
Basically, if you fail to file an FBAR, the standard penalty for willful. So if there’s a willful failure, it’s $100K or 50% of the balance. And in some cases, if there’s a willful failure to file, you can go to jail. Okay?
If it’s nonwillful, it can go $10,000 for each year that you require to file and you haven’t filed it. And there’s also potential additional penalties that could boost that penalty even higher if it’s not willful. Okay. As I mentioned, it’s $10k each year, and that can keep going up. There’s multiples. For example, if the IRS have taken a pre-account approach, the FBAR, that means that the person could be penalized for each separate account they fail to disclose. Okay? So the potential for penalties go up. IRS can find this stuff because they require foreign financial institutions to report US accounts, so they’ll find you. Okay? We guarantee it.
And if you didn’t file a file, there’s voluntary compliance programs that you can go back, assuming the IRS hasn’t found you already and you can pay to get back into compliance. But don’t mess around. So, if you have an LLC wholly owned by an IRA has a bank account, more than $10K outside the US, where you, we’ll get to the 8938 in a second. File the FinCEN 114 is due when you file your return; there’s an extension to October 15. But if you’re in the gray area, file it. Okay? If you own the bank account or the asset directly in an IRA or 401(k)l you’re good, there’s an exemption. But, if you own it through an LLC, single member LLC, checkbook control, whatever. File the FBAR.
So the 8938 is another type of form. Generally, if you file the FBAR, in most cases, you file the 8938. The 8938 is attached to your tax return, which brings into bear, how the hell do you file the 8938 since the IRA is potentially the owner of the LLC? So, the way this gets filed is if you have a partnership, so you have two IRAs, you have an IRA that owns partnership and it owns an interest in a foreign asset, the partnership would file the FBAR. The problem is what happens if you have a single member LLC? Single member LLCs don’t file tax returns. They don’t file 1065s. The Schedule C on the 1040. Problem is IRAs don’t file 1040s. How do you even attach the 8938?
I’ve had some clients just file partnership return, even though they only have one owner, to attach the 8938 to the partnership return because the penalties are so steep if you fail to file. Okay, so basically you have to file this 8938 if you are a specified person, which we’ll get to in a second, and you have an interest in a specified foreign financial asset, and the value of those assets is more than $10k. Specified persons, basically a US person. And then it goes into entities, domestic entities.
You are specified domestic entity. If you’re one of the following: a Corp, also a partnership, that at least 50% gross income for passive income, and that’s how you kind of get forced into the 8938. So, if you have a partnership and you have 50% of its gross income from passive income and you have an interest in a foreign asset, you’re probably going to file the 8938. The issue is if you have a single member LLC, where do you file it? Again, because you can’t attach it to your return, and that’s where you have some issues.
Obviously, when they thought of these rules and instructions, they really didn’t consider IRA LLCs. They basically are like, okay, you’re an IRA, you’re exempted or 401(k), you’re exempted and you don’t have to deal with it. But if the IRA owns the LLC, they just assume that the LLC would file the 8938. But, they didn’t really think about the single member LLC situation, where the IRA is the sole owner of the LLC and the IRA owner is the manager. How do you file this thing? And that’s what you need to deal with.
So, if you look at the requirements for filing, most of them are based off your marital status. So, that’s why some people think this 8938, since it’s tied to the tax returns, really not meant for retirement accounts. The problem is there’s also domestic entity requirements and values of foreign assets and how you determine foreign assets. So, I think, I strongly suggest, you file the 8938, attach it to a partnership return if you’re a single member LLC. I don’t think I’d attach it to your individual tax return because you’re not the owner of that LLC, your IRA is. But again, I’ve heard clients kind of unsure what to do, and some have attached it to their individual return. They didn’t want to follow a partnership return because they’re not a partnership.
So, it’s a messy situation. The IRS is not messing around with this stuff. They are strongly focused on compliance for FBARs and 8938s. So, just be super, super, super careful.
The penalties, just like the FBARs are super high, and there’s potential criminal exposure too, if it’s willful. So,e you don’t want to be there. You do have reasonable cause exceptions to reduce penalties, but you don’t want to be there.
If you are investing directly in an IRA or 401(k), you don’t have to worry about FBARs. The LLC is the problem, especially the single member LLC. If it’s a multiple member LLC partnership, you could attach the 8938 to the 1065. You can file obviously the FBAR and the FinCEN 114 either way. But, if it’s a single member LLC, I think it’s still risky to argue that it’s a disregarded entity, and since the IRA owns the LLC, it avails itself to the exemption for FBAR and 8938. It’s risky because the penalties are so huge. And, even if you can get around and argue reasonable cause and argue your case, you’re still going to pay lawyers to argue for you, or accountants, and it just may not be worth it. It’s an information return, okay? They just want to make sure that Americans are reporting their foreign assets. That’s all this is about, right?
We remember reading about, in the 90s, people having money in Swiss Bank accounts. You’ve probably heard about Panama Papers and people hiding their funds outside the United States. The IRS is super focused on this, and they just want to make sure people are not doing it. So, it’s an information return. I like to keep an eye on you. If you have a bank account over $10k or an interest in a foreign asset, owned individually or through an entity, there are exceptions for IRAs and 401(k)s.
The problem is, if the single member LLC vehicle is used, it’s unclear what the rules are. And because the penalties are so steep, because there’s no tax due, it’s just an information return, I strongly suggest people file the FBAR on the Form 114 and the 8938. If you don’t want to attach it to your tax return, you can just file a 1065 even though you have one member, or you can decide to attach it to your return. You can always talk to an accountant or attorney about this, but it’s just not worth messing around because the penalties are so steep for failure to file.
It’s scary stuff. I wouldn’t mess around if you don’t have to. So, you have some time. Again, foreign bank accounts owned directly through an IRA or 401(k), you’re cool, you’re good. No FBAR, no 8938. But the single member LLC is the problem because the partnership you can attach it to the 1065 or just file the FBAR. Single member LLC – some people may want to argue that really zoned from a tax standpoint by the IRA, since it’s a disregard entity. The problem is it’s still technically owned by an LLC. You still have to respect the legal formality of the LLC from a limited liability standpoint, so I’m not sure how the IRS would react. All I know is the IRS is super litigious when it comes to FBARs and 8938. They do not mess around. People go to jail for this stuff, okay?
I don’t want to scare people. I’m not saying you wouldn’t be able to avail yourself a reasonable cause. It’s an IRA. Clearly you’re not willfully trying to evade taxes but the IRS will find you because these foreign institutions will report you. They have to. If they want to be part Swift and be part of the global financial system, they’re going to need to comply and the IRS, the US government has the force and ability to strong arm the financial institutions. They did it in Switzerland. They did it in South America, done it all over the world for the last 30 years and they’re not messing around. So, just be super cautious; not a complicated form, something to be worried about. If you’re not doing anything wrong but, report it, and just not worth really fighting this ruling you may not agree with it. It’s just an area of compliance that we need to deal with.
So again, any direct investment in an IRA or 401(k), you’re good; no FBAR, no 8938. But, if it’s owned through a single member LLC or a partnership or whatever, a trust, you probably are going to need to file the FBAR and the 8938, unless an exception is satisfied.
So there you go. Thank you for listening to this podcast. If you’re watching on YouTube thank you. I appreciate the support. I know it’s kind of not such an enjoyable topic but I really wanted to get it out there before April 18 to give people a chance. If they’re in this kind of compliance zone and they feel they may need to comply with FBARs. At least get an exemption, I should say an extension and see if you can satisfy an exception but, if you don’t, you want to file it. It’s not worth the risk of accumulating penalties and getting on the bad and angry side of the Internal Revenue Service.
So, thank you for listening! Thanks for watching and have a great rest of your week and take care of yourself!