While filing US tax returns Americans living abroador those with investments and accounts outside the US have additional obligations and requirements such as the Foreign Bank Account Report (FBAR) which tend to often be forgotten. Failing to file the FBAR can draw the attention of the IRS and lead to harsh penalties. To ensure you stay compliant (and off the IRS’s radar!), we have compiled the things you need to know about FBAR reporting and FBAR Filing requirements.
What Is the FBAR (Foreign Bank Account Report)?
The Foreign Bank Account Report (FBAR) is an annual report that all U.S. citizens, residents, and certain other persons must file with the United States Treasury Department in which the person has a financial interest in, or signature authority over, a financial account in a foreign country with an aggregate value of more than $10,000 at any time during the calendar year.
Please note that those filing FBAR aren’t taxed on the balance of the accounts or anything of the sort. This is a reporting requirement ONLY. The purpose of this filing is so that IRS is made aware of money laying overseas.
If you’re required to this reporting and ignore your such requirement, it can result in high penalties and legal consequences. The United States government has stepped up efforts to investigate and prosecute expats who fail to report their foreign-held financial assets. With this, we can state that the risk of non-compliance with FBAR regulation is more significant than ever.
Thankfully, the compliance, although tedious, is simple to comply with. In this article we will explain everything you need to know about the FBAR, including:
• Who needs to file the FBAR
• How to file your foreign bank account report
• FBAR deadlines and when to file
Who Needs to File the FBAR?
Any US person (that is considered a US tax resident) with a foreign account balance of $10,000 or more at any point during the tax year will need to file the FBAR. This requirement is triggered even if the balance hits $10,000 for a single day out of the entire year (or even a minute)!
The FBAR filing threshold is also an aggregate amount—meaning if you have multiple accounts, the total balance of all of your accounts together is what would trigger a filing requirement. An example of triggering a requirement would be keeping $4,000 in one account and $7,000 in another making the today$11,000 which would make the filing requirement a must.
Report Joint Accounts and All Others You Can Access
FBAR filing requirements apply to all foreign financial accounts in which you have a financial interest or signature authority, even if you do not monitor that account. Financial interest is determined based on who is the owner of the record or legal title while Signature authority means that you have some level of control over the disposition of assets through direct communication with the institution.
A good example which most could think they are exempt from including in this requirement would be were a we are a signatory on one of our employer’s bank accounts, but by FBAR regulations, this account must be reported.
Another example that often is overlooked in reporting is an account where it belongs to the spouse and only a spouse has access to. But if it’s a joint account, it must be reported.
FBAR Applies to All US Persons, Not Just Citizens
The IRS says that the FBAR is required for “United States persons” who meet the reporting threshold. The term “US persons” refers to:
• Resident aliens (also determined by Substantial Presence Test)
• Domestic entities
How to File the FBAR
The FBAR is a separate filing from your federal tax return. It must be submitted separately to the Department of the Treasury, not the IRS. The FBARis filed through form FinCEN114 and is submittedelectronically through the BSA e-filing system.
Information to Include on the FBAR
Most filers believe that the reporting only requires to report foreign bank account balances. However, the filing is a bit more complexed and all if applicable from the list below would be reported:
• Foreign stock or securities held in a financial account at a foreign financial institution (the account itself must be reported, but the contents of the account do not need to be reported separately)
• Financial account held at a foreign branch of a US bank
• Foreign mutual funds
• Foreign-issued life insurance or annuity contract with a cash value
How to Report Joint Accounts on the FBAR
If you and your partner only hold joint accounts, have your spouse sign FinCEN Form 114a to allow you to file the FBAR on their behalf.
If your spouse has other accounts that you are not on (i.e., individual foreign financial accounts), they must file their FBAR separately.
When filing separately, you must both include your joint accounts on each of your individual forms.
Good Records Are the Key to Simplified FBAR Filing
Recordkeeping is essential to keeping up with how you file the FBAR. Submitted forms must contain the following information:
• The maximum value (converted to USD using the end-of-year exchange rate) of each account during the reporting period
• The name on the account(s)
• The number/other designation of the account
• The type of account
• The name and address of the institution or other person with whom the account is maintained
FBAR Deadline for Expats
The FBAR must be filed by the April 15th tax deadline (or the next business day if April 15th falls on a weekend and/or holiday). Should you by any change miss or extend your taxes, an automatic extension is given changing the new tax filing due date to October 15th (same rule weekend or holiday apples).
What Are the FBAR Penalties for Not Filing?
The penalties for failing to file an FBAR when required are in most cases severe.
• For those whose lack of filing was non-willful(meaning you didn’t know about your reporting obligation)
o Carries a $10,000 penalty per violation or an higher penalty could be determined
o No criminal charges will be brought
o An abatement of penalty can be applied for
• If it is determined that you purposely avoided filing
o Fines can be $100,000 or 50% of the account’s balance at the time of the violation, whichever is greater.
o Criminal charges will be applicable
In the past, the IRS wasn’t decisive on whether these FBAR penalties were per-form or per account. Per-form means that a single penalty would apply for each FBAR form that wasn’t filed per year. However, court rulings have now made it official and clarified that the IRS is to apply penalties on a per-account basis. That means that violators are fined separately for each account they fail to report. Here is an example of a penalty:
Lily a filer required to comply with FBAR failed to disclose six of her foreign accounts for the past three years because he didn’t know it was required. Since she has a total of 6 accounts she would be facing a fine of $180,000 (6 accounts x $10,000 fine x 3 years = $180,000).
With the introduction of the FATCA legislation in 2010, the chances of getting caught have increased, as foreign financial institutions are now required to notify the IRS of their foreign accounts. In short, by not complying with requirements, the IRS will assume those account where hidden and penalties will apply.
What Should I Do If I Haven’t Filed an FBAR?
No need to panic There are Millions of filers required to comply with this filing that are past due and the IRS has been so kind to create two amnesty programs to help you get caught up:
• The Streamlined Compliance Procedures
• The Delinquent FBAR Submission Procedures
Both of these tax amnesty programs allow those required to file to comply with US tax law without paying any penalties. Here is a short summary of how each of these programs work.
Streamlined Compliance Procedures
The Streamlined Compliance Procedures should be utilized byt those filers that have failed to file an annual income tax return as well as any required FBARs. To utilize the Streamlined Compliance Procedures, all you have to do is:
• Self-certify that your failure to file was accidental, not willful
• File your last three delinquent income tax returns and pay any taxes you owed on those returns
• File FBARs for the previous six years
Delinquent FBAR Submission Procedures
If you’re only behind on filing FBARs while being up to date on your annual tax returns, you can use the Delinquent FBAR Submission Procedures instead. To do this is simple, you must;
• Self-certify that your failure to file was not willful
• File all delinquent FBARs
In most cases, complying with this filings should be sufficient to bring you into compliance with IRS standards. Please note that these tax amnesty options are generally only available if you initiate the process yourself. Should the IRS discover your delinquency and contact you first, these programs will most likely become ineligible and you subject to penalties.
Common Misconceptions While Filing for FBAR
It’s a common misconception that an overseas account with less than $10,000 doesn’t need to be reported. However, if the combined highest value of all foreign accounts on any day in the tax year exceeds $10,000, then all accounts must be reported on the FBAR.
Another mistake is assuming that a nominee doesn’t need to report an account on the FBAR. Even if the account belongs to another person, the nominee must still file the FBAR if it meets the dollar threshold.
It’s also important to understand what needs to be disclosed on the FBAR. Foreign mutual funds and foreign life insurance/annuity policies with a cash surrender value must be reported.
Lastly, filing an extension for your US income tax return does not extend the FBAR filing deadline. The FBAR is a separate requirement with a different due date, so it’s crucial to file it on time to avoid penalties.
Other Foreign Financial Reporting Requirements
In the past, some filers where able to get comfortable evading the FBAR because it was hard for the IRS to track down those violating the requirement. The FBAR is required for US citizens because foreign banks don’t have the exact reporting requirements as institutions in the US, making it harder for the US to investigate potential non-compliance cases.
However, the Foreign Account Tax Compliance Act (FATCA) changed all of this. FATCA requires individuals or businesses with foreign accounts meeting the reporting threshold of $50,000 to file Form 8938 with the IRS.
Let’s see why FATCA is different from FBAR:
• FATCA is filed with the IRS as part of your tax return
• FATCA reporting thresholds are higher
• Most importantly, FATCA requires foreign financial institutions to report directly to the IRS on financial accounts held by US taxpayers.
Because foreign financial institutions report directly to the IRS it makes this process critical since the government can easily find out about your unreported foreign assets. This dramatically increases the chances that the IRS will catch you if you fail to file an FBAR when required.