March 28, 2014

Foreign Sweep Accounts – Protect Yourself from Costly Penalties

By Patrick Mullin, Director, Tax & Business Services

Foreign Sweep Accounts – Protect Yourself from Costly Penalties Advisory

Do you have any bank accounts with a “foreign sweep” feature? If so, you’ll want to read on to ensure you’re not at risk for significant financial penalties related to failing to disclose/report foreign bank accounts.

foreign sweep accounts

What are sweep accounts?

Many banks offer an “overnight sweep” feature that sweeps excess funds in an account to another branch of the bank. The idea is that your funds never sleep – they earn both during the day and at night.

How do you know if your sweep feature requires foreign bank account reporting?

In the past, it may not have not been immediately apparent that an account utilized a foreign sweep feature.

One specific example is detailed below:

A client recently received a 2013 Form 1099-INT for an account bearing a description that made it clear that the account had an offshore feature.  After further inquiry, we learned that the client added an overnight sweep feature to their business checking account.

For pre-2013 tax years, the Forms 1099-INT issued did not indicate the sweep account had a foreign component.

It seems likely that at least some other banks may not clearly identifying foreign sweep accounts on Forms 1099-INT, and as a result, customers may not realize that the account may fall under foreign bank account reporting requirements.

What are my reporting requirements?

Any U.S. taxpayer with title or beneficial ownership (or even just signatory authority) over a foreign sweep account may need to report the account both on an FBAR (Report of Foreign Bank and Financial Accounts – now FinCEN Report 114; formerly TD F 90-22.1) and on a Statement of Foreign Financial Assets (Form 8938, filed with income tax returns beginning for 2011).

What are the penalties of non-compliance?

Clients who failed to file a FBAR and/or 8938 report for foreign sweep accounts for years pre-2013 could face significant penalties for failure to disclose/report these accounts as foreign.

How can I ensure my accounts are compliant?

We advise that you consult with a trusted tax professional to ensure that you are not at risk of any tax penalties related to your sweep account.

For more information on foreign sweep accounts, please contact Patrick Mullin, Director, Tax & Business Services.

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