Nowadays, for a US taxpayer to have a bank account or investment in another country is quite commonplace. Unfortunately, keeping your money tucked away in a foreign account somewhere does not mean you get to skip informing the authorities – in this case, the US Treasury Department. You may have heard of the need to file an FBAR, which stands for, “Foreign Bank Account Report”. As the name implies, all US citizens are required to provide the details of their foreign bank accounts or financial investments in what is also referred to as the “Financial Crimes Enforcement Network” FinCen Form 114. Since the whole process of filing an FBAR has been made wickedly complex, here’s the who, when, where and how of filing an FBAR, and sparing yourself from the dreaded FBAR penalties.
If you need help with your FBAR report to the IRS please call us at 407-502-2400, or email us at [email protected].
While the agony of having to file taxes with the IRS is well documented, it is not known to many that the FBAR has been around for many years, and is used as a tool for individuals to report their foreign financial account balances to the US Treasury Department. The FBAR is simply a reporting tool and does not generate taxes in itself, but it does have to be filed by all US citizens and companies who own or have an interest in any foreign bank, or have financial accounts that exceed a certain threshold in the calendar year. The main purpose of the FBAR is to prevent the hiding of assets or income kept offshore to avoid income taxes.
Who Should File FBAR
All individuals who have a financial interest or signature authority over a foreign account or investment that amounts to more than $10,000 are obligated to file the FBAR with the US Treasury Department. The individual or filer, or an individual who’s authorized by the filer (in writing) has to complete the FinCEN Form 114a and submit it electronically via the BSA E-Filing System. Failing to do so could lead to significant civil, and in some cases, criminal penalties. According to the FBAR, all individuals having a foreign financial account that exceeds the given threshold in the form of the following are required under the Bank Secrecy Act to provide information of their foreign accounts on a yearly basis.
- Bank and retirement accounts.
- Insurance policies.
- Mutual funds or equity interest in the fund.
- Individually owned bonds, stock certificates, notes.
- Annuities with cash surrender value.
- Foreign Online Gambling Accounts
Important Note: The threshold of $10,000 applies to all foreign accounts that are either owned jointly or separately, including those foreign accounts where you may not have any financial interest, but have signature authority over (business accounts that you are in charge of).
When to File an FBAR?
For many years, the FBAR filing dates had been out of sync with the deadlines for filing of federal tax returns. For US citizens living overseas, the US federal return was due before June 15th rather than April 15th, which can be further extended to October 15th. The complicated deadlines only made it harder for expatriates to make their FBAR and tax filing. However, in 2016, a big change was made for FBAR reporting, with the FBAR deadline moving up to the fall and in line with Tax Day. This change has made it easier for expats living abroad to stay compliant with their FBAR filing. The new annual due date for the FBAR is April 18, 2017, which coincides with the federal income tax filing deadline. The FinCEN announced that all FBAR filers get an extension for 2016 reporting until October 15th of 2017.
Expat Income Tax Returns
The deadline for expats to file their tax returns for 2016 was June 15, 2017 since expats living abroad qualify for an automatic-two month filing extension. Although the two-month filing extension does apply to FBARs as well, the six-month automatic extension does supersede the shorter extension and will provide expats with more time to get their documents in order. But, more importantly, expats living abroad will still have to pay their taxes that are due by April 18, 2017, even if they plan on filing their return by June 15.
Important Note: Those who fail to pay their taxes due by April 18, 2017 will find that the IRS won’t assess a ‘failure-to-pay’ penalty if they file and pay by June 15, 2017. But, you will still be charged interest on the unpaid amount if your taxes are not paid by the April deadline. This is why it is best to start your tax filing as soon as possible, even if you are missing a document or two.
Where To File an FBAR?
FBAR is a report that’s submitted annually and has to be filed before April 18th of the year following the calendar year being reported. Filing is done electronically via FinCEN’s E-filing system. Filers can get access to the FBAR application at http://bsaefiling.fincen.treas.gov/ or contact the FinCEN help desk at 1-866-346-9478, or send an e-mail to [email protected] to find out more about the process.
Important Note: The FBAR filing deadline will now follow the Federal income tax due date, which means if the Federal income tax due date falls on a Saturday, Sunday, or legal holiday, a return is considered timely only if it is filed on the succeeding day that isn’t a Saturday, Sunday, or legal holiday.
How to File an FBAR?
It is important to note that FBAR is completely separate to your tax returns, and as such, is not to be filed along with the federal tax returns. Instead, the FBAR is filed separately with FinCEN. More importantly, even those who are not obligated to file their tax returns with the IRS have to file an FBAR with the US Treasury Department. Filers will need to fill out the Schedule B, Part III of their tax return and also Form 8938. US citizens need to report their worldwide income, including those in foreign trusts or bank accounts, and in some cases, the filer will need to attach the Schedule B (Form 1040) to their tax returns. The following are a couple of steps that need to be followed by those who are looking forward to file an FBAR.
First, filers need to determine the maximum value of each of their foreign accounts in the currency of the account during a calendar year, with the maximum value being a reasonable approximation of the larger value of non-monetary or currency assets in said account during a calendar year. To simplify the process, filers can turn to periodic account statements to determine the maximum value of their foreign accounts. For an account denominated in U.S. Dollars, the maximum value of the account is the largest US Dollar value of the account during the report year.
If the filer has a foreign account with non-US currency, they will need to convert the maximum account value for each of their accounts into US dollars first before proceeding. This can easily be done by using the US Treasury’s Financial Management Service Rate at www.fms.treas.gov, as given in the last day of the calendar year. In cases where there is no rate given on the Treasury Financial Management Service, filers are advised to use another reliable exchange rate, and also provide the source of the exchange rate. As a rule of thumb, it is important to only use the values as given on the last day of the calendar year if the valuing currency of a country uses multiple exchange rates. Needless to say, if the maximum account value of a single account or an aggregate of the maximum account values of multiple accounts reach or exceed $10,000 you will have to file an FBAR. However, an FBAR is not required to be filed if the person did not have $10,000 of maximum value or aggregate maximum value in foreign financial accounts. US taxpayers with specified foreign financial assets which exceed the given threshold must report those assets to the IRS using Form 8938, which is the ‘Statement of Specified Foreign Financial Assets’ and is to be filed with their income tax returns.
Record Keeping Requirements
It is crucial for all filers of FBAR to retain records containing the name in which each of their accounts are being maintained, along with another designation of the account, the account type, the name and address of the foreign financial institution which maintains the account, and the maximum account value of each of the accounts. All records need to be retained for a period of at least five years, from April 18thof the year following the calendar year reported, and must be available for inspection. To help satisfy your record keeping needs, filers could retain the filed FBAR document. That being said, an officer or an employee filing an FBAR in order to report signature authority over an employer’s foreign financial account cannot retain any records regarding those accounts.
Filing by Third Party Preparer:
It is possible that the FBAR form can be filed on behalf of the filer and/or the owner of the foreign account(s) by a third party. That being said, the filer who is using the services of the third party will need to maintain a record of the FinCEN Form 114a as well. They will also be required to have a FinCEN BSA E-Filing Signature Authorization Record that will enable them to authorize any filling carried out by a third party. If a filer or owner is using the services of a third party they will not have to send Form 114a to FinCEN. Rather, Form 114a should be maintained by the filer and made available to the FinCEN or the IRS only after if it had been requested.
Important Note: Spouses who are filing a joint FBAR could also be required to complete and submit form 114a to approve which spouse will sign the report.
Using the BSA E-Filing System
The BSA (Bank Secrecy Act) E-Filing System allows individuals to file FBAR online through a secure network provided by the FinCEN. The BSA e-filing system offers a faster, convenient and cost-effective way of submitting FBAR forms. Apart from FinCEN’s BSA E-Filing System, filers can also utilize preparation services that have the capabilities of filling the FBAR. It is not unheard of for individuals to file a joint FBAR, that is, only if a person owns accounts jointly with their spouse. Otherwise, each spouse will have to file their own FBAR.
Important Note: It is important here to note that if an individual is filing either prior year FBARs or amended FBARs, they will still need to use FinCEN’s website.
How does BSA E-Filing Work?
One of the main benefits of using the BSA E-Filing System is that it’s a safe and secure way of filing FBAR. Once you receive a user ID and password from FinCEN, individuals and organizations can easily file their BSA forms with FinCEN using a secure network.
- Enhances security over current manual processes through the use of SSL and user IDs/passwords.
- Accelerates submission process to FinCEN.
- Improves form submission management and record-keeping.
For Group Filers:
- Eradicatesinternal routing, tape cutting, or shipping processes.
- Does away with the manual processes associated with handling diskettes for diskette filers.
- Rapidly delivers filing data.
- Makes real-time checking easier.
- Ensures faster receipt from FinCEN.
For Individual Filers:
- Allows efficient data entry through secure electronic forms.
- Enhances internal routing of forms when there is need of review.
- Allows data storage.
- Delivers acknowledgments electronically from FinCEN.
- Improves accuracy of forms.
The FATCA Factor
Those US citizens who are living overseas and have dropped out of the tax filing system could find themselves in a difficult situation, mainly due to the non-US ban or financial accounts that they have which requires them to file an FBAR. This procedure is considered to be extremely important mainly because even the IRS now has far more harsh penalties for those who fail to file an FBAR or file their FBAR form incorrectly.
The importance of filling an FBAR cannot be understated, especially because of the FATCA or the Foreign Account Tax Compliance Act that was introduced back in 2014. According to the FATCO, certain information is required to be collected by foreign financial institutions. The information that is required to be collected, pertaining to the assets of US persons in a country will then be relayed either directly or indirectly by the local government authority to the IRS. Under the FATCA rules, it has become easier for the IRS to cross-reference any information that has been provided by an individual’s tax returns (Form 1040) and the foreign financial institutions to ensure whether or not a person has shared the correct information on their tax form and FBAR form.
The first information reports were sent to the IRS back in 2015, and the reporting system has only gotten stronger. What this means is if the IRS learns of non-compliance of a tax payer from a financial institution, the taxpayer will get disqualified from entering an IRS Voluntary Disclosure initiative. For those who are staring at potential criminal tax exposure, this can mean either serious prison time or staying out of jail. The IRS may assess an inflation-adjusted civil penalty which does not exceed $12,459 per violation, for non-willful violations that are not due to reasonable cause.
For those who need a gentle nudge, any person who is required to file an FBAR and fails to do so will be subject to a civil that can otherwise avoided altogether if a person files an FBAR. On the other hand, if there is a reasonable cause for the failure, but account is properly reported there will be no penalty. But, any individual who willfully fails to report an account while filing an FBAR will be subject to a civil monetary penalty equal to the greater of $100,000, or 50% of the balance in the account at the time of the violation. According to FinCEN’s website, more than 1 million FBAR filings were filed in 2015 alone. Contrary to what is believed by many, the FBAR is only an informational document, which means, no additional tax will be added, but US tax payers may find themselves having to pay penalties if they choose not to file an FBAR.
If you need help with your FBAR report to the IRS please call us at 407-502-2400, or email us at [email protected].