A US citizen or resident can have a foreign account for a multitude of reasons. For some, it is an investment since it allows one to invest money in a currency other than the USD. These account holders can sometimes profit due to currency appreciation if they have a high-risk tolerance and are able to track daily fluctuations. And for some, it is a savings account while working overseas since it is just logistically easier to access funds this way.
Regardless of the reason why a person has a foreign account, the IRS needs them to file the FBAR if certain thresholds are met. This applies when an account is opened at a foreign bank on foreign soil, or even at a US bank on foreign soil.
The US government came up with this as many US citizens and residents have tried to “hide” their assets in foreign accounts and evade taxes. FBAR is a way of preventing its citizens from doing this.
What is FBAR?
FBAR stands for “Foreign Bank Account Report”. In particular, it refers to FinCEN Form 114. Its purpose is to inform the IRS of any foreign assets that a taxpayer possesses. It is a part of the Bank Secrecy Act (BSA), 1970, and is also known as Currency and Foreign Transactions Reporting Act.
Since June 2013, all US taxpayers with foreign accounts totalling more than $10,000 have been required to fill out FinCEN 114 electronically via the Financial Crimes Enforcement Network’s BSA E-Filing System. It is separate from the federal income tax documents and has to be filed separately. So, FBAR is not technically an IRS tax form, it is just a reporting form to tell the government the maximum value the taxpayer had in his offshore financial accounts in the tax year. Hence, even if the person does not have a tax filing requirement, he still has to file the FBAR form.
Accounts to be reported under FBAR
Offshore financial accounts that need to be filed and reported in an FBAR include:
- Bank accounts including checking accounts, savings accounts, and time deposits
- Joint accounts with a spouse
- Securities and financial instruments accounts including brokerage accounts
- Foreign pension accounts
- Overseas Life Insurance Policies or Annuities
- Mutual funds or similar pooled funds
- Cryptocurrency held in non-US wallets
Any person who has the above-mentioned assets and whose aggregate value of such assets exceeds the $10,000 value anytime in the year has to file the FBAR. Even if the aggregate balance reaches $10,000 for one single day, reporting has to be done.
This means that even if the assets are split across accounts such that they individually never reach the $10,000 mark, and if the total value exceeds $10,000 even for one day, they are still reportable.
Accounts held by minors also need to be reported. Not just individuals, but trusts, corporations, estates, and partnerships may also have to file FinCEN Form 114 subject to filing requirements. Timely reporting is essential as it may otherwise attract hefty fines and penalties. The reporting has to be done in USD using the Treasury year-end exchange rate.
Apart from the aforementioned personal and corporate accounts, even accounts over which one has signature authority need to be reported. Signature authority is when the individual has some control over the assets through direct communication with the institution.
Some accounts need not be reported, like:
- a trust where one is a beneficiary and is already being reported by another US citizen/resident
- account maintained by a United States Military financial institution
- account owned by a government entity
- account owned by an international financial institution
- correspondent/nostro account
- foreign financial accounts held in individual retirement accounts
- foreign hedge funds and private equity funds
Foreign real estate held directly, foreign currency held directly, precious metals held directly, art and antiques also need not be reported.
How to file FBAR
- Determine if you are required to file FBAR. According to the IRS, all US persons which include U.S. citizens, resident aliens, trusts, estates, and domestic entities with offshore financial accounts that meet the threshold need to file the FBAR. Resident aliens of US territories also come under this definition.
- Determine what accounts you need to consider and whether they meet the reporting threshold. This is where, just like filing taxes with IRS, good record-keeping makes the work easier. This becomes important as it is not just bank accounts that need to be considered, but all the aforementioned accounts that include insurance and securities accounts.
You may have crossed the $10,000 threshold last year and filed the FBAR, but stayed below the threshold this year- in such a case you need not file the FBAR this year. Similarly, you may not have crossed the threshold last year and not filed the FBAR, but this year if it crossed the threshold, you will have to file it. Do not rely on what you did or did not do in the previous filing year. Check your accounts and file accordingly.
- Categorize the accounts. The FBAR is broken down into three main categories- ownership, joint ownership, and signature authority. So segregate your accounts based on those categories correctly and make sure you do not include a signature authority account under the ownership account or vice-versa.
- File the FBAR. For each account, you need to furnish the account number, the name listed on the account, the type of account, the name and address of the financial institution, the maximum value of the account. The FBAR cannot be filed on paper. It needs to be done electronically through the BSA’s e-filing system.
If you and your partner/spouse hold joint accounts, then one of the partners needs to sign FinCEN form 114a ‘Record of authorization to electronically file FBARs and the other can do the filing on their behalf.
If a tax professional is going to be filing on your behalf, even then you would need to sign FinCEN form 114a. This form need not be sent to FinCEN, but it needs to be kept for your records.
Deadlines and Penalties
The FBAR needs to be filed by April 15th, 2022. An automatic extension applies until October 15th, 2022. No special permission is required.
If you somehow miss the due date, then you will need to catch up before the authorities find out. The IRS has a program called Streamlined Filing Procedures under which those who were unaware of their filing obligations can file past the due date without any late penalty.
For non-willful avoidance, the fine can be up to $12,921 per violation.
For willful avoidance, i.e if you purposely avoid filing, the fine can be as high as $129,210 or 50% of the balance of the account at the time of the violation, whichever is greater. They may also be subject to criminal penalties. Criminal penalties may have fines of up to $500,000 and imprisonment of up to 10 years, along with civil penalties.
Knowingly and willingly falsifying an FBAR also attracts a penalty of 50% of the amount in the account or $100,000, whichever is greater.
The only scenario wherein it is okay to not file an FBAR is if all your accounts are jointly-owned with your spouse, you have signed FinCEN form 114a and your spouse reports the accounts. Here, your filing status does not have any effect on FBAR filing i.e even if your income tax filing status is married filing separately, only one partner needs to file the FBAR on behalf of both.
Summing up some common FBAR filling errors that are to be avoided
- Do not assume that just because there is no tax filing requirement, there is no FBAR filing requirement. Both the filings are independent of each other.
- Filing applies to more than just bank accounts. It includes different types of foreign financial accounts and assets, including life insurance policies with cash value, mutual funds, and more.
- Misunderstanding the filing threshold is the most common mistake made by filers. Some filers go out of their way to split their finances in such a way that none of the accounts reaches the $10,000 thinking that this will exempt them from filing FBAR. But this is not the case. It’s the aggregate value that counts, regardless of the number of accounts and the amount in each account.
- Ownership is not the only condition for reporting on an FBAR. Even if you are not the owner of an account, and only have signature authority, you must still report it.
- Minors also need to file the FBAR. They will need to sign form 114a so that a parent or guardian can do the filing for them. If they cannot sign the 114a due to their age, then a parent or a guardian can sign it on their behalf.
Just like the income tax filing, FBAR filing must be done with care especially if you are an expat. An expat may need to file Form 8938 under FATCA as well. To make sure you do not make any mistakes in the FBAR filings and to avoid any penalties, it is suggested that you take the help of a CFO consulting service.