In today’s global economy, it’s common for U.S. citizens to have income derived outside the U.S., along with bank accounts located in other countries. Most people in this situation understand that they’ll be taxed by the IRS on their worldwide incomes. But many are unaware they must also report foreign bank account information in certain situations. Failure to do so can have life-changing consequences.
The IRS tracks foreign assets held by U.S. taxpayers in a number of ways, primarily through supplements that must be completed and filed with federal tax returns. There is, however, one very important form that must be filed separately: the Report of Foreign Bank and Financial Accounts, or FBAR. The FBAR form must be filed with the Financial Crimes and Enforcement Network (FinCEN) each year. Its purpose is to provide foreign account information to the U.S. Treasury, which uses the data to track illicit funds and prevent the hiding of offshore assets.
The FBAR reporting threshold is fairly low. The form must be filed when the aggregate value of all foreign accounts exceeds $10,000 at any point during the year. Failure to file can result in severe penalties, with fines as high as $100,000 or 50% of the account balance, whichever is greater. This is one of the most expensive mistakes an expat can make, and yet many U.S. citizens with financial assets outside the country are unaware of FBAR’s existence.
Who must file
According to the IRS, any United States person, including a citizen, resident, corporation, partnership, Limited Liability Company, trust and estate, must file an FBAR if they have financial interest in or signature authority over at least one financial account located outside the U.S. It’s important to note that FBAR filing obligations don’t just apply to personal accounts. An employee or officer of a company or non-profit organization who has a signature authority over a foreign financial account must in certain situations file an FBAR, even if he or she has no financial interest in that account.
The reporting threshold is triggered when the total value of all foreign accounts exceeds $10,000 at any time during the year. This applies to all U.S. persons, regardless of age or circumstance.
The IRS defines a foreign financial account as any financial account located abroad, even if it doesn’t produce taxable income. There are five types of accounts that are exempt from FBAR reporting requirements:
- U.S. government entity accounts
- International financial institution accounts
- U.S. military banking facility accounts
- Correspondent or nostro accounts
- Certain custodial or omnibus accounts
Further exemptions include:
- IRA owners and beneficiaries
- Participants in and beneficiaries of a tax-qualified retirement plan
- Certain trust beneficiaries
- U.S. entities included in a consolidated FBAR
How and when to file
FBAR is an annual report due on April 15. If you fail to meet the due date, you’re allowed an automatic extension to October 15.
As mentioned above, FBARs are not filed through the IRS with your federal tax returns. Instead, they must be filed electronically through the Financial Crime Enforcement Network’s e-filing system.
Any taxpayer who files an FBAR should keep records for each account reported. The records should be kept for five years from the FBAR’s due date and should contain the following information:
- Name on account
- Account number
- Name and address of the foreign bank
- Type of account
- Maximum value during the year
FBAR penalties depend on whether the failure to disclose is wilful or non-wilful. For those whose lack of filing is non-wilful, meaning they truly didn’t know about the reporting obligation, the fine can be as much as $10,000 per violation. If failure to file is intentional, it’s classified as a wilful violation and can result in a fine as high as $100,000 or 50% of the account balance at the time of the violation, whichever is greater. The maximum penalty for a violation under the Bank Secrecy Act is adjusted for inflation annually.
Filing delinquent FBARs
In an effort to encourage taxpayers with offshore assets to come forward and comply with FBAR requirements, the federal government has put several offshore voluntary disclosure programs in place. These programs allow non-complying individuals to voluntarily report undisclosed income as long as they are able to truthfully certify that their failure to report was not wilful avoidance. More information on these programs can be found here.
FBAR is not FATCA
FBAR should not be mistaken for reporting requirements that fall under the Foreign Account Tax Compliance Act, or FATCA. FATCA is part of the Hiring Incentives to Restore Employment (HIRE) Act, which was designed to promote transparency in the global financial services sector and enforce stricter tax compliance among taxpayers with financial assets outside the U.S. According to FATCA, any U.S. taxpayer with foreign account holdings that exceed an aggregate value of $50,000 on the last day of the tax year, or more than $75,000 at any time during the tax year, must report this information in their annual tax returns with Form 8938. In these circumstances, a taxpayer may be required to submit both an FBAR and a Form 8398.
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