The Internal Revenue Service (IRS) has the authority to obtain the information about US residents who have financial interest over accounts maintained outside the country. This authority has been vested to the Treasury Department by the Bank Secrecy Act (BSA).
BSA, which was introduced in the year 1970 to prevent money laundering, requires that individuals who have signature authority or financial interest over accounts whose aggregate financial values exceed 10,000 must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).
In this article, we provide detailed information about how to file FBAR and the exceptions regarding the filing requirements.
Call us at 407-502-2400 or email us at [email protected] for any FBAR needs you may have.
Previously, individuals who had signature authority or financial interest in foreign accounts whose value exceeded $10,000 had to file Treasure Form TD F 90-22.1. However, in April 2003 the Financial Crimes and Enforcement Network (FinCEN) delegated the authority to the IRS to collect information regarding FBAR.
Presently, the IRS has the responsibility to:
- Collect information about foreign accounts
- Examine possible violation of the civil law
- Determine and collect penalties for non-filing of the form
- Introduce rules regarding filing of the form
US residents maintain foreign accounts for a variety of legit reasons such as easy access, low fees, or convenience. They are required to file FBAR since the foreign financial firms may have lax reporting requirements unlike those in the US.
The FBAR is used as a financial tool to prevent individuals having foreign accounts to circumvent US law. The information present in the FBAR report is used to monitor the use of foreign funds. The US government will assess the report to determine whether the foreign funds are being used for legal purposes. The FBAR report is also used to determine unreported income that must be taxed by the IRS.
Who is Required to File FBAR?
Every US person who has a signatory authority or financial interest over an account that is held outside the US must know how to file FBAR. The due date for filing FAR report is April 15. It has specifically been set at this date to coincide with the filing season of income tax. Individuals who are not able to meet the due date filing requirements are granted anautomatic extension of six months. Accordingly, if you are not able to file FBAR by April 15, you can file the report by October 15. No formal request is required to extend the submission date.
An important thing to understand is the meaning of US person according to the BSA. A US person refers to an individual who fulfills the following requirements.
- A resident or citizen of the US,
- An entity that is created in the US. It can be partnership, corporation, or limited liability corporation. An entity can also be an estate or a trust that is formed according to the US laws.
Remember that every entity registered in the US must know how to file FBAR regardless of whether they are exempted from filing the taxes. The tax treatment of a US based entity does not affect the requirement for filing taxes.
Also, keep in mind that both the US residents and citizens should know how to file FBAR. Some people think that US residents and citizens are the same. The reality is that a US resident can be an alien (non-citizen) residing in the US.
The residency test 26 U.S.C. § 7701(b) is used to determine whether a person is considered a US resident. The § 7701(b) residency test states that the person must reside in a US territory, and not just mainland states, including:
- American Samoa
- Indian lands that are defined in the Indian Gaming Regulatory Act
- the Commonwealth of Puerto Rico
- the Commonwealth of Northern Mariana Islands
- the US Virgin Islands, and Guan
Suppose that Brian is a citizen of Colombia. He has been physically present in one of the territories of the US for the past three years. In such a case, Brian is considered to be a resident of the US, according to 26 U.S.C. § 7701(b), and is required to file an FBAR.
Another example will help in clarifying the concept of US resident. Suppose, Carlyle a citizen of the UK is a legal resident of the US. The tax treaty specifies that Carlyle is a tax resident of the UK. In such a situation, Carlyle is required to file an FBAR. Why? Tax treaties may exempt a foreign national US resident from submitting taxes to the IRS, but it does exempt a person from filing FBAR.
Types of Foreign Financial Accounts Subjected to FBAR
Generally, any type of foreign account held with a financial firm abroad is known as a foreign financial account. For instance, an account that is maintained with a US bank’s overseas branch located in France is a foreign financial account. However, an account maintained with a German Bank located in New York is not considered a foreign financial account, according to the provisions of the FinCEN.
Another situation when the FBAR reporting requirements do not apply is when a US citizen buy a security of a foreign firm that is situated in the US. For instance, if Jack purchases securities of a German company through a broker situated in Texas, then he is not required to report the account in FBAR report since he had bought the securities through a financial company located in the US.
The financial accounts that are subjected to the legal provisions of the BSA include the following:
- bank accounts such as time deposits, checking accounts, and savings accounts,
- brokerage account,
- trust and mutual fund accounts,
- Security accounts such as security derivatives, brokerage accounts, and other similar financial securities accounts
- Options and commodity futures accounts,
- Insurance policies accounts having a cash value such as whole life insurance policy
The above list of foreign accounts is not exhaustive. Any foreign account over which an individual has a signatory authority or holds financial interest must be reported in the FBAR. Other types of accounts that are subjected to FBAR reporting requirements include the following.
- Canadian Registered Retirement Savings Plan (RRSP),
- Free Savings Account (TFSA),
- Mexican Administradoras de Fondos para el Retiro (AFORE)
- Mexican individual retirement accounts (Fondos para el Retiro)
What is Meant by Signature Authorityand Financial Interest in Foreign Accounts?
We have mentioned above that FBAR must be filed by a US person who holds a signature authority and financial interests in foreign accounts. The question is what is meant by these terms?
A person is said to have a financial interest in a foreign bank account if any one of the following two conditions is fulfilled.
- The US person holds the legal title or record of the bank account. It is irrespective whether the account is maintained for the beneficiary of the holder or another person, even a non-resident individual.
- The holder or owner of the foreign account acts as a nominee, agent, or attorney on behalf of the US national.
A simple example can help in clarifying the above two points. Suppose that Alex is a US citizen who owns a foreign account in Mexico. His brother Sanchez maintains the account on behalf of his brother. The account is held by Sanchez who accesses the accounts according to the instructions of his brother. In such a case, Alex is said to have a financial interest in a foreign account. If Sanchez is also a US resident, he must also submit an FBAR report.
The filing requirements are also present if the individuals own around 50 percent value of a stock, or 50 percent voting power, in a company that owns foreign accounts. For examples, suppose that a US person owns 80 percent of a British company that has foreign accounts. In such a case, the individual has to file FBAR since the US person owns more than 50 percent shares of the company. Keep in mind that this requirement holds valid for corporations as well who owns shares in foreign companies.
Signature authority, on the other hand, means that a US person must have the authority to open or close the foreign account. The person should have control over the foreign account, and directs the bank or financial firm to act regarding the account.
For instance, Melaine who is a US resident has a power of attorney on the accounts of her elderly parents in Canada. In such a case, she is required to file an FBAR if power of attorney provides signature authority over the foreign accounts. It is irrelevant whether the signature authority is actually exercised.
Exception to the FBAR Reporting Requirements
Keep in mind that certain foreign accounts are exempted from the FBAR reporting requirements. Private equity funds and foreign hedge funds are not reportable according to FBAR regulations. The latest regulations that were issued by the FinCEN does not require FBAR filing for these accounts.
Other exceptions to FBAR reporting requirements include the following. Some of the accounts and persons for which filing exceptions is applicable include the following.
- Nostro accounts — a bank account that is held by a domestic bank in a foreign country usually denominated in the foreign currency.
- Certain overseas accounts that are jointly owned by partners
- US persons who are mentioned in a consolidated FBAR
- Foreign accounts that are owned by an international financial firm
- Beneficiaries and owners of the US IRAs
- Tax-qualified retirement plans participants and beneficiaries
- Foreign accounts maintained on a US military banking facility
- Trust beneficiaries if the US person reports on behalf of the trust
You should remember that any US person who holds a foreign account needs to know how to file FBAR. This is the case even if the foreign account of the US person does not generate any taxable income.
How to File FBAR?
Now that you know about FBAR, let’s find out how to file FBAR. Reporting and filing FBAR can be done online using FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). In addition, the individuals will be required to disclose information about their foreign accounts by answering questions regarding foreign accounts in the tax Form 1040 Schedule B.
The FinCEN form can be submitted electronically using the BSA e-filling system. The electronic filing system supports thefiling of forms either in batch or individually. The forms are submitted through a secure network that prevents unauthorizedaccess.
Also, you should use a separate FinCEN Report 114a, Record of Authorization to Electronically File FBARs if you submit the report jointly with your partner, or when you want a third party to file the report on your behalf. This form is not submitted with the FBAR. Instead, the form is maintained by the account owner online that can be accessed by the IRS and FinCEN when required.
In addition, US taxpayers with specific foreign financial assets may need to submit Form 8938, Statement of Specified Foreign Financial Asset. This form must be filed with the income tax returns. The form is filed separately from the FBAR report. It includes foreign accounts that are reported on the FBAR.
What are the System Requirements for Filing FBAR?
Electronic filing of the forms is convenient, fast, and more cost effective as compared to the manual filing of the forms. The filing system is hosted on a secure online server managed by FinCEN. Individuals must register with the FinCEN system to get an ID and password.
In order to file the FBAR electronically, you must meet system requirements. Not meeting the system requirements could result in incorrect filing of the report. Here are the minimum requirements for filing an FBAR report.
- At least 56 kbps internet connection — Speed of the internet connection will determine the time it takes to upload the FBAR report to BSA e-filing system. Make sure that the internet speed is adequate to allow you to quickly upload the file.
- Minimum hardware requirements — Your system should meet the following specifications.
- Processor: Intel Pentium III or greater.
- RAM: 1 GB or more.
- Free Disk Space: 200 MB or more.
- Operating system: Windows 10, Windows 8, Windows 7 with service pack 1 or later, Windows XP Professional with service pack 2 or later. At the moment, you can’t access BSA filing system using an Apple platform.
- Web browser: Firefox 19.0.2 or higher, Chrome 25 or higher, Internet Explorer 8.0 or higher.
- Firewall access to port 443 — The firewall access to port 443 is required for SSLv3 encryption., which encrypts all data that is submitted to the BSA e-filling system.
Also, you need to have Adobe Reader installed on your PC to file FBAR using the BSA e-filing system.
Penalties for Incomplete FBAR Filing
An important thing to remember regarding how to file FBAR is that it has no connection with IRS federal tax returns. The deadlines for filing IRS tax returns do not apply to FBAR reports.
However, just as the IRS fines individuals for submitting incomplete tax files, it also levies monetary penalties for incorrect or incomplete filing of the FBAR.
The IRS may impose an inflation-adjusted civil penalty that does not exceed $124,588, or half of the balance in the account for every violation. That’s why it’s important that you know how to file FBAR properly to avoid hefty fines. It’s better that you consult with a professional advisor to know how to file FBAR.
Individuals who have not filed the FBAR on time, and who are not subjected to a criminal investigation or civil examination by the IRS, must file delinquent FBARs as per the guidelines. They must also include a statement about the reasons for the late filing of the FBAR report.
When filing online, the BSA e-filing system will present a list of options for late filing of the report. You can either select one of the options, or select a custom explanation by clicking on ‘Other’. An important thing to keep in mind regarding how to file FBAR is that the IRS will not impose a fine for late submission of FBARs in case the income is reported properly in the tax return file, and the tax amount has been paid.
You can get detailed explanation about FBAR filing by calling the Regulatory Helpline by dialing 800-949-2732 from within the US. If calling from outside the US, you should dial 703-905-395.
Why Contact an Expert?
You should contact an expert to properly file FBAR. There are many things that must be considered when filing an FBAR. The IRS impose a hefty fine if you make any mistake in filing the report. A professional can make sure that the FBAR is filed properly without any errors. This will allow you to avoid paying any fine to the IRS.
Call us at 407-502-2400 or email us at [email protected] for any FBAR needs you may have.