Tax laws can be confusing, and matters can become even trickier when foreign financial accounts are added to the equation. If you are a US individual with non-US assets or accounts, one crucial form that you must file is the Foreign Bank Account Report or FBAR. Unfortunately, many taxpayers make errors while handling their FBAR filings, resulting in serious penalties and additional stress. This article will explore some of the most common FBAR mistakes and how to avoid them.
The Foreign Bank Account Report (FBAR), also referred as FinCEN Form 114, is filed by US persons who meet the minimum threshold requirements for filing. If the value of all your foreign accounts exceeds $10,000 at any time during the calendar year, you will likely need to file an FBAR. Generally, the deadline for filing an FBAR is April 15th. However, if you miss the April due date, you will receive an automatic extension until October 15th.
Common FBAR Mistakes to Avoid
1. Failing to Submit FBAR
The most common mistake individuals make with FBAR is simply not filing it. This can happen for various reasons, such as a lack of awareness or understanding of the filing obligations or intentionally choosing not to disclose foreign assets. Non-filing of the FBAR can result in severe penalties. For non-willful conduct, the penalty is $10,000 per violation, while willful conduct can lead to a penalty of $100,000 or 50% of the account balance at the time of the violation.
It’s important to be aware of your filing obligations and take the necessary steps to comply with the regulations. Note that the FBAR filing requirement doesn’t only apply to U.S. citizens but also to other individuals who are considered “U.S. persons“.
2. Misunderstanding the Filing Threshold for FBAR
Another common mistake is misunderstanding the FBAR filing threshold. Some mistakenly believe they do not need to file an FBAR if none of their individual accounts reach $10,000 annually. In certain cases, they may even take measures to ensure that no account reaches this balance. However, it’s important to understand that the FBAR threshold is based on the aggregate balance of all accounts. Individual balances do not matter. If your account’s total value exceeds $10,000 during the year, you must file an FBAR. Understanding this requirement and filing the FBAR accordingly is important to ensure compliance.
3. Missing to Report All Relevant Foreign Financial Accounts
It’s a common misconception to think that the FBAR reporting requirement only applies to bank accounts. However, the rule extends to various types of foreign financial accounts and assets, such as foreign retirement accounts, life insurance policies with cash value, mutual funds, and more. If you’re uncertain about whether your accounts fall under the FBAR reporting obligation, consult with a tax professional who can guide you through the reporting process.
4. Thinking that Ownership Alone Determines FBAR Filing
Another common mistake that taxpayers often make is believing that only ownership of a foreign financial account determines their FBAR filing obligations. However, it’s essential to understand that FBAR requirements extend beyond ownership alone. Even if you do not technically own the account, if you have any form of authority or control over a foreign financial account even just signature authority, you may still be obligated to file an FBAR.
5. Believing That The FBAR Doesn’t Apply to Minor Children
It is a mistake to assume that the FBAR filing requirement does not apply to minor children. There is no exception for minors when it comes to filing the FBAR. Regardless of age, if a minor child meets the filing threshold, they must also submit the FBAR. Therefore, if a minor child has a foreign financial account and the total value of their accounts meets or exceeds the filing threshold, they must file the FBAR, just like any other taxpayer.
Normally, it’s the child’s job to file their own FBAR. But sometimes, due to their age, they may not be able to do it themselves. In such cases, the responsibility falls on the child’s parent, guardian, or another person legally responsible for them to file the FBAR on their behalf.
6. Assuming FBAR Is Not Necessary if No Individual Tax Return Is Required
Some people mistakenly assume that if there is no individual tax return filing requirement, an FBAR filing is not necessary. However, it’s important to understand that the FBAR filing requirement is separate from the individual tax return requirement. Even if you are exempt from filing an individual tax return, if you meet the FBAR filing requirements, such as having a financial interest in or signature authority over foreign financial accounts that exceed the filing threshold, you must still file the FBAR.
7. Underreporting the Maximum Account Value
When filing the FBAR, it is critical to report the maximum value of each foreign account accurately. The FBAR requires reporting the account’s highest value reached during the calendar year, rather than the year-end or average balance.
8. Not Reporting Dormant or Closed Accounts
Even if an account is dormant or has been closed, it still needs to be reported on the FBAR. Some individuals wrongly assume that dormant or closed accounts are exempt from reporting, but that is not the case. If an account was open at any point during the corresponding reporting period, you must include it in the FBAR filing. This applies regardless of the account’s current balance or whether it was closed during the calendar year.
9. Maintaining No Proper Records
When filing your FBAR, it’s important to maintain detailed records for each account, including the account name, number, foreign bank’s name and address, account type, and highest value during the reporting period. You should keep these records for at least six years from when you file the FBAR. Neglecting to keep adequate records, such as statements, and not holding onto them for the required period can lead to penalties if the IRS or FinCEN asks for these records and you’re unable to provide them. To avoid this, set up a system to keep track of your account details and ensure compliance.
10. Leaving Off Business Accounts
When filing your FBAR, make sure to include all foreign accounts related to your business. It doesn’t matter what kind of entity your business is (like a corporation, partnership, LLC, trust, or estate) as long as it’s organized under U.S. laws or any other foreign country. If your business has foreign accounts that exceed the filing threshold, be sure to report them in your FBAR filing.
11. Missing to Report Prior Years FBAR
If you have missed filing the FBAR for multiple years, it’s important to address the issue before the IRS reaches out to you. However, we do not recommend starting filing for the current year or past years without utilizing the available amnesty programs, such as a streamlined disclosure program. Doing outside of a voluntary compliance program can lead to fines and penalties. To navigate this situation, it’s a good idea to seek advice from a tax specialist who can help you determine the best option to use for your specific situation.
12. Assuming the IRS Won’t Collect
Many believe that if the IRS caught them and fined them for FBAR violations, the IRS won’t be able to enforce collection. However, that’s not true. The IRS has a six-year window to assess penalties for these violations. Furthermore, they have the authority to seize your money and possessions to cover the fines. In extreme cases, they can even freeze your passport, preventing you from using it. It’s important to take this seriously and fulfill your obligations to avoid potential consequences enforced by the IRS.
In conclusion, understanding and complying with FBAR reporting requirements is essential to avoid potential consequences imposed by the IRS. If you’re unsure about whether you need to complete these forms, Tax Samaritan is here to assist you. We can review your situation and provide guidance on your FBAR obligations. Even if you have already missed filing one or more FBARs, our experienced team can help. We are well-versed in the various resolutions available to taxpayers with delinquent FBARs and can offer valuable advice on each option. Don’t hesitate to reach out to Tax Samaritan for accurate preparation and proper submission of your FBAR forms.