The Traveling Tax Attorney Series Part One: Munich, Germany
Federal Republic of Germany
Foreign Account Tax Compliance Act
Model 1 Status: In Force
“I received a letter from my bank telling me that my account was going to be reported to the IRS because I’m a U.S. person. I’m not American. I’m a German citizen with a green card. I already have to pay U.S. taxes on my German income. Why would I even think to tell the U.S. government about the money in my German bank account? I got that letter on a Friday afternoon and couldn’t sleep for three nights until my banker explained the letter on Monday morning.”
“My company filed my U.S. and German tax returns after my first year of employment. Neither my German accountant nor my U.S. accountant ever told me that I was required to file an FBAR. I learned about the FBAR through my American friends here in Munich. I had no idea. None.”
“What’s the FBAR?”
Thousands of American citizens and residents live and work in Germany, an economic powerhouse ripe with employment and investment opportunities. I’m currently in Munich, Bavaria, a picturesque and historical city full of culture and innovation. Did you know that most of the things we associate with German culture are actually from Bavaria? Oktoberfest, lederhosens, BMW, weisswurst, and beer gardens all originated in Bavaria. Bavaria is also known as Germany’s Silicon Valley and is home to hundreds of companies including pharmaceutical, biotech, automotive and IT firms, making it one of the most prosperous German states. With prosperity comes growth and that has created the opportunity for Americans to work here.
As part of the Traveling Tax Attorney Series I’m here in Germany advising people on their U.S. income tax and asset reporting obligations. Through the process I’ve also gained a better understanding of the lack of awareness about these reporting requirements. The experience of a U.S. citizen or resident working in Germany is a bit different than a person from a nation that employs a territorial tax system. The United States has a worldwide tax system, which means that U.S. citizens and residents are required to pay tax on all income earned, including foreign income. The territorial tax system, a system used by most countries in the world, does not tax foreign income. Additionally, U.S. taxpayers have information return reporting obligations regarding foreign assets.
Some of the people I’ve met with recently received the dreaded FATCA (Foreign Account Tax Compliance Act) bank letter informing them that their accounts were going to be reported to the Internal Revenue Service (IRS) because of their status as a U.S. person (For FATCA purposes a U.S. person includes but is not limited to U.S citizens and residents). Why are they receiving these letters you ask. Here’s why. Germany and the United States signed the Foreign Account Tax Compliance Act Intergovernmental Agreement in which the countries agreed to follow Model 1. Pursuant to the agreement, German financial institutions are required to report all information regarding assets held by U.S. persons to the German Federal Central Taxing Authority (Bundeszentralamt fur Steur). The German taxing authorities will then provide the information to the IRS. The IRS uses the information to verify that the identified U.S. persons have fulfilled their reporting obligations and pursue noncompliant individuals.
One of the asset reporting requirements is the FBAR, a critical informational report filed with the U.S. Department of Treasury. Unfortunately, the unintentional failure to comply with these reporting obligations can result in costly and burdensome penalties. My website rampltaxlaw.com has more about the FBAR in a separate post and I’ll recap it for you below.
The Report of Foreign Bank and Financial Accounts, also known as the FBAR, must be filed if (1) you are a United States person (For FBAR purposes a U.S. person includes but is not limited to U.S. citizens, U.S. residents, certain visa holders, U.S. residents for tax purposes if you satisfy the Substantial Presence Test, corporations organized in the U.S., as well as trusts or estates organized under U.S. law) with a financial interest in or signature authority over at least one foreign financial account (A foreign financial account includes but is not limited to bank accounts, brokerage accounts, mutual funds, passbook accounts, insurance or annuity accounts with cash values, and certain foreign retirement accounts) and (2) the aggregate value of all foreign financial accounts exceeded $10,000 USD at any time during the calendar year. Non-willful FBAR violations are penalized $10,000 per year. Willful FBAR violations are penalized $100,000 or 50% of the balance in the account at the time of the violation, whichever is higher.
Most people I’ve spoken to during this trip had absolutely no idea that they were required to file an FBAR or any other informational return for that matter. Their failure to comply with these reporting obligations was innocent and non-willful. There was no intention to conceal the account nor was there an attempt to evade the payment of U.S. taxes for the income earned on their accounts. They simply did not know that these reporting obligations existed. The penalties for these violations are severe but there are IRS offshore voluntary disclosure programs available to facilitate compliance.
Non-willful offshore reporting violations can be remedied through offshore voluntary disclosure programs including the Streamlined Domestic Offshore Procedures for U.S. Taxpayers residing in the United States and the Streamlined Foreign Offshore Procedures for U.S. Taxpayers residing outside of the United States. Willful offshore reporting violations can be disclosed through the Offshore Voluntary Disclosure Program (OVDP). I will expand upon the Streamlined Filing Compliance Procedures and the Offshore Voluntary Disclosure Program in Parts Two and Three of this series. The important thing to know is that resolution can be achieved by qualifying taxpayers seeking to come into compliance with their income tax and asset reporting obligations.
My firm has experience with successfully filing submissions through the Offshore Voluntary Disclosures Program and the Streamlined Domestic and Foreign Offshore Procedures on behalf of clients in the United States and throughout the world. I also provide tax compliance consultations for U.S. citizens and residents living and working abroad and consult with foreigners living and working in the United States. Please follow along for Parts Two and Three of the Traveling Tax Attorney Series for more on the Offshore Voluntary Disclosure Program and the Streamlined Compliance Procedures.
If you have questions regarding the Report of Foreign Bank and Financial Accounts (FBAR), please contact: Kristina Rampl, Esq., Tax LL.M. Boston • Cambridge Direct: 617/500-6652 • Fax: 617/217-0813