Have you been filing your FBAR? Or do you prefer staying in ignorance? Learn more about them, and take steps to file them today. What if you don’t? You run the risk of being inquired by the IRS, and if you are caught, that’s going to be too bad. You’ll have to face harsh penalties which can be as severe as $500,000, and you may even end up in jail. What if you do it unknowingly? Penalties are still around $10,000 for each of your accounts.
Call us at 407-502-2400 or email us at [email protected] for any FBAR needs you may have.
Are you on your toes now? Good. So the Foreign Bank Account Report or the FBAR is a mandatory obligation if you are a US tax payer and hold a number of assets and offshore accounts, which are in excess of reporting limits.
The US government uses FBAR as a tool to identify people who try to find workarounds around the laws of this country. Investigators make use of this report to identify and track funds, which might have been used for illicit means, figure out income that is not reported, but earned aboard, and discover undisclosed foreign accounts. Obviously, if you don’t file, you encounter huge penalties, and may even have to bear criminal consequences.
Generally, most of you are often confused about disclosing foreign accounts, when to file FBAR, which steps to take and how to stay compliant with this obligatory tax requirement? Let’s take a detailed look at FBAR.
I want to know more about FBAR
FBAR stands for Foreign Bank Account Report, and makes a reference to the Report of Foreign Bank and Financial Accounts, TD F90-221. Today the form is known as FinCEN 114, because FBAR is processed by the Financial Crimes Enforcement Network (FinCEN), a division of the Department of Treasury. FBAR has to be filed by ‘US persons’; we’ll discuss detailed requirements later in this blog. FBAR is pursuant to the Bank Secrecy Act: Title 31 that isn’t part of the IRC or the International Revenue Code.
FBAR isn’t filed with your taxes, but has to be filed separately. The FBAR should be received by the due date because it isn’t filed under Internal Revenue Code; if you miss the due date, you would be considered late. The form is filed electronically – if you are filing late for previous years, then also you would do it through the electronic system.
What’s the purpose?
Initially, FBAR was deemed a requirement by the Bank Secrecy Act in the year 1970. The primary aim then was to acquire information, which would prove to be useful when carrying out investigations against regulatory, tax or criminal violations. In the year 2001, the scope of the Patriotic Act increased to cover protection against terrorism. When the 9/11 attack took place, greater emphasis was placed on this protection, and so the government suddenly began prioritizing reporting requirements.
So should I file FBAR?
You file the FBAR with the Treasury department, if you meet the following requirements.
- You are a US citizen or a resident; your residency status is determined through two tests, the substantial presence test and the green card test, which are outlined in Section 7701 (b). Please note that if you are a non US citizen, but if you pass any of the two tests, you would be considered a resident.
- You have signature authority or some kind of financial interest in a foreign account, which can include a brokerage account, a bank account, trust, mutual fund and other possible account types, maintained with any financial institution.
- Your accounts have an aggregates value greater than $10,000.
- If you have some foreign assets that are beyond certain thresholds, then you should additionally report those assets using Form 8938.
Please note that entities which were established and are organized under the US laws, have to file FBAR as well. Entities include, but are not limited to corporations, estates, trusts, liability companies and partnerships.
The Substantial Presence Test
You pass the substantial presence test, if you are physically in the US.
- For at least 31 days of the current year, and
- 183 days in the current year, and two years before it; this number includes the following days
- All the days for which are you are in the US during the current year
- One-third of the days for which you were physically present in the US, the year before the current year
- One-sixth of the days you were physical present in the US, two years before the current year
Particularly, if you have been in the US in a non-exempt status for more than 6 months of the tax year under consideration, you qualify the SPT, and are treated as a US resident. Physical presence means that you are present in:
- any of the 50 states or Washington DC
- US territorial waters (which spread 12 nautical miles away from the coastal line), or
- The subsoil/seabed of submarine areas which are right next to the territorial waters; the US has a right to explore and exploit resources in these areas under the international law. Submarine areas spread out to 200 nautical miles from the land.
Some days may not be counted in light of some complicated exemptions. Also, some of you may be exempted from the test itself.
The Green Card Test
The Green Card Test or the GCT states you are a US person, if you spend at least one day in the country as a lawful permanent resident during the current year or the calendar year under consideration. Being a lawful permanent resident means you have a green card.
If you voluntarily abandon the resident status, and present the same in writing to the United States Citizenship and Immigration Services or USCIS, you are no longer considered a lawful permanent resident. The same can be said if a court terminates your immigration status. In both cases, you fail the Green Card Test.
I want to file – how to do it?
Previously, FBAR was filed using paper based forms, but IRS has eliminated most of these traditional methods now. The only way to file an FBAR is to do it online through the Financial Crimes Enforcement Network’s e-filing system, and fill out the FinCEN Form 114. Once again, this is the only way to file an FBAR.
When you complete the FinCEN form, you should have included details for all your foreign assets and accounts, exempt assets, asset value and other necessary information. Ensure that you are providing all these details in an acceptable and usable format. Please keep the following points in mind with regards to formatting.
- Telephone numbers – Don’t include any hyphens or parenthesis. For instance, if the telephone number is 1 (123) 456-7890, then enter it as 11234567890 on the FinCEN form 114.
- Social security numbers – Just like contact numbers, social security numbers should also not contain any space or hyphens.
- Monetary Value – You have to report your account’s maximum value; this should be specified in US dollars after you have valued your account through an accepted method. Report the valued figure by rounding up to a whole dollar value.
- Prohibited Entries – Some common abbreviations and specific words shouldn’t be mentioned on the FBAR form sic as DBA, NA, AKA, See Above, Unknown, None and Various.
Needless to say, all information which you provide should be complete and accurate. Incomplete forms may lead to severe consequences.
I’m not sure which accounts I should disclose
Generally, you are required to disclose the following accounts.
- Bank accounts, securities and financial accounts
- Accounts which you hold in commingled funds or mutual funds, and have an equity interest in them
- Bonds, stock certificates, notes and unsecured loans
- Foreign life insurance or annuity, if the cash surrender value is ‘account ‘
- Foreign online gambling accounts
- You should report your accounts, even if they don’t produce any taxable income.
Tell me about the deadline
Okay, so you got all that we’ve discovered so far, and are now wondering when to file the FBAR. What’s the tax deadline for 2018? It’s April 17, and the same holds for FBAR. If you have any foreign assets or an overseas tax payer, you should file FBAR by April 17, provided that your bank balances cross certain thresholds. FBAR form is different from the standard tax form, and has to be filed separately through the electronic system.
Previously, FBAR or FinCEN, had to be filed by June 30. But, it was only this year that the deadline changed, and now the FBAR due date is the same as taxes.
But what if I miss the due date
There is a 6 months extension. So, if for any reason, you don’t file by April 18, the deadline will be extended to October 15, automatically. You don’t have any to file additional request for this. However, it’s best that you file within the due date, and get done with it.
Please keep in mind that applying for a tax extension doesn’t mean you would get extension for FBAR as well; you have to file it separately.
I don’t want to file the FBAR – are there any risks?
FBAR isn’t something that you should take lightly. Not filing can lead to huge penalties, so we’d advise you against it. Even if your violation is non-willingly, you may still be penalized by $10,000; and that’s for each of your account, and not the total penalty amount. What if you don’t file willfully? It’ll get worse. You’ll have to pay $100,000 or 50% of the amount in your account, and once again, this is for every account. Should a criminal penalty be imposed on you, then you may be paying fines up to $500,000, and spend 10 years in jail at the most. Criminal penalties can be imposed together with civil penalties. Also, you pay greater penalties if IRS identifies your financial institution.
Scared? The penalties are harsh, but the IRS is a bit lenient in some aspects, so you may be able to squeeze yourself out from the fines. For starters, you can get an extension. What if you miss out on that? If you are showing all foreign income on your tax returns or aren’t being investigated by the IRS, then you will probably not be penalized when you file late. Discuss your case with an accountant, and they should be able to help you out.
Am I likely to make some mistakes?
Some FBAR mistakes are quite common. Ensure that you avoid the following.
- If you have several offshore accounts, and one of them has a value of less than $10,000, then you may be tempted not to report them. Wrong. You have to report all of your foreign accounts, if the highest aggregate value is $10,000 or more on any single day of the tax year.
- If you share an account with someone else, you may think that you won’t have to report it on the FBAR form. Again wrong. You should still mention the account if the threshold is crossed.
- Generally, people don’t really understand which accounts to report, and may miss out foreign annuity or life insurance, whereas both of them should be disclosed.
- If you fail to file FBAR, then you have to apply for an extension separately. But many people make the mistake of assuming that a tax extension also guarantees an FBAR extension, whereas that isn’t the case.
- A common mistake is that if an LLC or trust is a disregarded entity, then it can skip filing FBAR. As per the rules, the way in which an entity is treated for taxes doesn’t determine if it should file an FBAR or not. Generally, if the entity is formed and organized under US laws, then FBAR has to be filed.
I heard of a Streamlined or Voluntary Disclosure program somewhere
Previously, when no extension was allowed, individuals proceeded by making a quiet disclosure or coming forward under the OVDP or the Streamlined Disclosure, if they missed the deadline; the approaches can still be utilized for filing FBAR for past years.
Quiet disclosure is when you amend your tax return to show your foreign income, and then file FBAR. But IRS is already pursing taxpayers who tried to avoid penalties in this way, so this approach isn’t recommended. So, what can you do then? If you haven’t mentioned foreign income on your tax return, and didn’t file FBAR, then you can enter the Offshore Voluntary Disclosure Program or OVDP. You can participate in the Offshore Voluntary Disclosure Program, if you’re a US person who didn’t previously disclose interests in foreign assets and financial accounts. The OVDP is advantageous in the sense that it can reduce your penalties and minimize the chances of criminal prosecution. Before proceeding, you should consider several factors, and accordingly decide if you pursue OVDP or go with another approach.
If your failure to file isn’t willful, then you can also come forward through the Streamlined Filing Compliance Procedure, which means you can eliminate more penalties and may be making fewer amendments to your tax returns than with an OVDP. However, risks are greater, and so you should only utilize Streamlined Disclosure if your circumstances are appropriate. A tax attorney can help you decide between the two.
Time is of essence because you can become ineligible for Streamlined Disclosure and OVDP in some cases. Take necessary actions soon, so that you can avoid the worst while still achieving compliance with the tax system.
Some of you may also want to sit quiet, and do nothing, but we really don’t recommend it, whatever your circumstances may be. The US government has drawn up information sharing agreements with over a 100 countries across the globe, so that they can get information about US tax payers that have foreign bank accounts. This means that sooner or later, your foreign account will be discovered, and when that happens, you may be penalized harshly.
The Attorney – Client Privilege
If you have not been filing FBARs till now, talk to a tax attorney, and let them determine if your violation can be treated as non willful. An attorney – client privilege protects confidential communications, and prevents them from being used against you in a criminal proceeding.
Still didn’t understand foreign bank accounts report? Don’t know when to file FBAR? Not sure how to fill up the form? Seek professional help, and they’ll explain all the details to you. Finance and tax experts have dealt with thousands and thousands of FBAR filings, and can explain all your concerns. So, do reach out to them if you want help of any sort.
Call us at 407-502-2400 or email us at [email protected] for any FBAR needs you may have.