If you own or have signature authority over a financial account located with a custodian outside the United States, then you may have to file a FinCen Form 114 by June 30, 2014. This year you must file electronically. No extensions are available. Failure to file a required FinCen Form 114 can result in a penalty equal to 50% (yes fifty percent) of the highest balance for each year the form is not filed or is filed late.
A penalty example, Fred has the equivalent of $100,000 parked in a United Kingdom office of Citigroup. The account pays little interest income and Fred neither adds to the account or uses the funds in any way. Fred does not include the interest income on his return nor does he file Form FinCen 114 for 2011, 2012, and 2013. For simplicity we will assume the highest balance each year when converting to US dollars is $100,000. IRS catches Fred and then assesses $150,000 ($100,000 * 50% * three years) in penalties, back income taxes, penalties and interest on the back income taxes. Now Fred owes $150,000 on the account and the balance is only $100,000. Fred has lost money on this and may also be subject to criminal prosecution.
Notice in the example that the financial institution is Citigroup, a U.S. based bank that has branches in the UK. It is the location of the account branch that is important not home country of the custodian.
Financial accounts include, but are not limited to, banks, credit unions, stock brokers, mutual funds, insurance contracts, and retirement plans. Some accounts are excluded but if you have an account of any kind with a foreign company where the branch is located outside the U.S., you need to read up on the requirements or consult a tax professional.
Signature authority includes the ability to order someone else to do something with the account. For example, a Chief Financial Officer who can order a foreign assistant to transfer funds from a foreign account has signature authority even though she is not on the signature card with the foreign bank.
For those wondering, holding foreign stocks in a U.S. brokerage account or owning U.S. based mutual funds invested in foreign stocks does not subject you to the FinCen reporting regime.
FinCen stands for Financial Crimes Enforcement Network.