In today’s growing world, it is fairly common for the taxpayers in the US to have a financial account located outside the US. This foreign account may be kept for investment, banking or pension purposes. Having a foreign account abides you to file FBAR, a special form with the Financial Crimes and Enforcement Network of the Department of the US. If you fail to file for this report, you can be charged with heavy penalties.
Call us at 407-502-2400 or email us at [email protected] for any FBAR questions, or needs you may have.
As per the American tax law, if you are a person residing in the US with a financial interest or a signature authority over any foreign financial account, you are required to report the account to the Department of Treasury annually through electronic filing. You are obligated to file both FBAR and the FinCEN if you have a foreign bank account, mutual fund or trust. Unfortunately, not many US citizens are familiar with the details of the FBAR. Before they know about its details, the government is already after them and there is a long list of penalties piled up on them. Thus, it is important as a citizen of the US to know about the FBAR and the laws associated with it to make sure nothing legal comes up against you.
Let us discuss in detail what the FBAR is and who needs to file it.
What is FBAR?
In 1970, BSA (Bank Secrecy Act) was introduced in the US to take measures to prevent money laundering. It required the individuals with a financial interest or signature authority over accounts having an aggregate financial value exceeding $10,000 to file the FinCEN Form No:114. This form is the FBAR, Report of Foreign Bank and Financial Accounts.
Previously, Treasure Form TD F 90-22.1 was to be filed by the individuals with a financial interest or authority in foreign accounts exceeding the $10,000 limit. This, however, was changed in April 2003 when the FinCEN, the Financial Crimes and Enforcement Network, delegated this authority to collect information about the FBAR to the IRS.
The IRS currently has the following responsibilities.
- Collecting information about all the foreign accounts held by US citizens
- Examining if the civil law is being violated in any case
- Determining, as well as, collecting penalties arising from the non-filing of the form
- Introducing and implementing rules related to filing of the forms
There are a variety of reasons of maintaining foreign accounts including but not limited to low fees, convenience and easy access. If you have a foreign account, it is mandatory for you to file the Foreign Bank Account Report for tax reporting purposes in the US. The Foreign Bank Account Reportallows the government of the US to keep a check on the foreign accounts maintained by the US citizens and to make sure they are not circumventing the US tax and other laws. The use of foreign funds is also monitored through the data collected through FBAR and it allows the government to make sure the funds are not used for any illegal purposes. The unreported income is also determined using the FBAR report for tax purposes by the IRS.
Who Needs to File FBAR?
To make it simple to understand who needs to file FBAR, here are some basic questions to ask.
- Do you live in the US and are a US citizen, Green Card holder, H1 visa or any other kind of visa holder?
- Do you have an authority over or maintain any foreign bank account?
- Do you have, at any moment, more than $10,000 in your foreign bank account?
If you answered yes to these questions, then you are obligated by the law to fie the Foreign Bank Account Report. The Foreign Bank Account Report must include information about all your accounts located outside the US, even if they have 0 or negative balance.
A US Person
You fall into the category of the people who need to file FBAR if you are a US person. By US person, it means all the citizens of the US, residents and entities including but not limited to partnerships, corporations, limited liability companies that are organized or created under the laws of the US and in the US. It also includes all the estates and trusts formed under the rules and regulations of the country.
Account to be Disclosed
US citizens who needs to file FBAR also need to disclose information about the following
- Bank, financial instruments and securities accounts
- Accounts that are held in mutual funds
- Accounts in which there is an equity interest of a US person in the fund
- The foreign life insurance entities are also part of “accounts”
- Annuities having a cash surrender value are also a part of the “accounts”
- Foreign Bank Account Report filing is also required for the foreign online gambling accounts
- Unsecured loans, stock certificates, notes and bonds individually owned by a US person are not part of “accounts”
You are mandated to file the Foreign Bank Account Report even if you hit the $10,000 limit in a foreign account for a day or even a minute. Also, the threshold of this $10,000 amount is also an aggregate amount. It means, if you have multiple foreign accounts, the filing requirement will be triggered by the total of the balance of all the foreign accounts you have. Thus, if you think keeping $5,000 in one bank account and $6,000 in another foreign bank account, this will not help you avoid filing the Foreign Bank Account Report. This will give you a better idea about who needs to file the FBAR.
The Foreign Bank Account Report requirement also applies to the US citizens who have a signing authority in a foreign bank account. It does not necessarily have to be your account to file the FBAR. If you have control over the disposition of money, funds or any other assets that are held by this foreign bank account, you have to file the Foreign Bank Account Report. Thus, if you are US citizen, and gave the authority over the opening or closing, depositing or withdrawing money from a foreign bank account, regardless of whose name it is in, you are responsible to file the FBAR to avoid being penalized.
Exceptions to the Reporting Requirement
Not everyone is included in the list of the people who need to file FBAR. There are certain exceptions when it comes to the FBAR reporting under the IRS rule.
- Foreign financial accounts that are held jointly by spouses
- Nostro/correspondent accounts
- Senior persons included in the consolidated FBAR report
- Financial accounts owned by the government
- Foreign financial accounts owned by international financial institutions
- Senior beneficiaries and owners of the IRA
- Tax-qualified participants and beneficiaries of retirement plans
- Certain individuals with a signature authority but no financial interest in the foreign account
- Financial accounts in a foreign country maintained inside a banking facility of the US Military
- US trust beneficiaries who are filing FBAR on behalf of a trust
How to File and Report Your FBAR?
Regardless of how much taxable income you have, you need to report and file FBAR if you fall under the above-mentioned clauses. You are obliged to file and report your FBAR if you have a foreign financial account, even if the foreign accounts yield you no taxable income. The reporting obligations are met by answering questions about the foreign accounts in the tax returns and by filing your FBAR.
Foreign Bank Account Report is a calendar year report. You need to make sure you file your FBAR and are done with the entire procedure before the 15th of April. You can file your Foreign Bank Account Report through the e-filing system of the FinCEN.
Some Common Mistakes of Foreign Bank Account Report Filing
Here are some common mistakes made when filing the FBAR.
- Many people are of the view that the individual balance of your foreign accounts need to be $10,000 for you to report it. This is not the case. You need to file FBAR if the total of the balance of all your foreign accounts is more than $10,000.
- Another mistake made by people who do not file their FBAR is the fact that they believe that they don’t need to file the FBAR for a foreign account that beneficially belongs to someone else. If you are a nominee, even if there is no beneficial ownership of the account by you, you still need to file the FBAR.
- Another common mistake about the FBAR filing is about its extension. Many people believe that filing an extension for the tax returns will also extend the due date of filing the FBAR. Remember, there is a different due date for filing your FBAR and filing the income tax. The due date has been made the same for just this year.
Answering Some FAQs about FBAR
Have some questions about FBAR? Read this space to get answers.
- What does FBAR stands for?
FBAR stands for Foreign Bank Account Report. It is the Report of Foreign Bank and Financial Accounts held by a US person.
- When is the deadline to file an FBAR?
The deadline of filing your FBAR is now the same as that of filing your individual tax returns, i.e. April 18th.
- Do I need to file the same form for tax returns and FBAR?
No. While the date for both tax returns and FBAR has been made the same, you still need to file both these forms separately. The FBAR needs to be submitted electronically using the BSA e-filing system to the Financial Crimes Enforcement Network of the US Treasury Department.
- Is there any extension for the deadline of filing your FBAR?
There is a 6-months extension in the deadline of filing your FBAR in 2017. For those who fail to file their FBAR by April 18th, the extended deadline is October 15th. There is also no need to file a request to make use of this extension as it is for everyone.
- I haven’t been filing my Foreign Bank Account Report. What should I do to stay out of trouble with the IRS?
If you have not been filing your FBAR because you did not know who needs to file FBAR or for any other reason, here is a good news. Streamlined Program allows you to come clean with the IRS without paying any additional penalties. Under this program, you need to file your FBARs of the past 6 years and the tax returns of 3 years and along with it, also submit a Certification of non-willful conduct. It is basically a statement that you did not evade filing your FBAR on purpose.
There is a bad news as well. The IRS can any time end time program which will leave anyone who have not filed their FBAR in trouble.
- What are the penalties for not filing your FBAR?
If you failed to file your FBAR due to a non-willful reason such not knowing you fall in the list of people who need to file FBAR, there is a penalty of up to $10,000 for each instance of non-compliance. This means you will have to pay $10,000 for each year you have not filed your FBAR. However, in case of willful non-filing of your FBAR, a penalty of 50% or greater the amount of the total balance in your foreign accounts or a fine of $100,000 is imposed by the IRS. You may also face a separate penalty for each year of not filing the FBAR. Failure to file your FBAR is a criminal offence and criminal proceedings may be started against the individual by the IRS.
- Should I file my FBAR late if I missed the deadline?
In most of the conditions, it is still better to file your Foreign Bank Account Report late rather than not filing it at all. The penalties of late filing are much less than those of non-filing.
- What is the meaning of “financial interest” in an account?
You have a financial interest in an account if any of the following are true.
- You are the owner of the account
- Somebody is acting as an owner of the account on your behalf
- The account is owned by a corporation 50% shares of which are owned by you
- The account is owned by a partnership with you having 50% interest in the capital or profits of the partnership
- The account has ownership interest by you and you are the trust grantor
- The account is of an entity of which you are the owner of 50% of the total value of profits, assets or have a voting power of the same
- What are the types of accounts who need to file FBAR?
The FBAR needs to be filed for the following accounts
- All kinds and types of foreign bank accounts
- Time deposit, deposit, demand and securities accounts
- Insurance policies having a cash value
- Commodity options or futures accounts
- Annuity policies having a cash value
- Comparable pooled fund or shares in mutual fund
- Pension funds of some kinds
- Jointly owned foreign accounts
The Foreign Bank Account Report 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.
As a US person (see the definition of US person above), it is mandatory for you to file your FBAR. You can also find the list of US persons who need to file FBAR above. Failing to file your Foreign Bank Account Report can lead to not only penalties, but can also result in criminal proceedings under the US law.
It is advised to take the services of an expert who has detailed understanding of who needs to file FBAR, the conditions one can take extension, the documents you will need and also help you in filing the report. Remember, a simple mistake related to filing the FBAR can lead to serious legal consequences. Every entity registered in the US must know how to file Foreign Bank Account Report 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.
The Foreign Bank Account Report is one of the tools used by the government of the US to put a stop to money laundering. It is the duty of every US person to file their Foreign Bank Account Report to help the government tackle the illegal money transfers and use.
Call us at 407-502-2400 or email us at [email protected] for any FBAR questions, or needs you may have.