What is FBAR Filing? Latest You Need To Know For 2021
What is FBAR? Whether you live inside or outside the United States, you may have an FBAR requirement to file the FinCen Form 114. If you have assets or accounts based in a foreign country, a filing requirement may apply. Below is some information to help you determine whether you need to file the FBAR. And to understand the FBAR instructions and process to complete it successfully.
What Is FBAR?
Some taxpayers have tried to avoid paying what they owe to the U.S.; by hiding their money in accounts overseas. To combat this problem, the U.S. has come up with ways to keep track of overseas assets belonging to U.S. persons.
The FBAR form came into existence as part of the Bank Secrecy Act of 1970 (BSA) to prevent taxpayers from avoiding paying taxes by hiding assets overseas. However, it’s only over the last two decades that the IRS has ramped up enforcement of foreign financial account reporting rules for American taxpayers.
The basic principles underlying these rules are simple. But, the details are complicated and overwhelming. Widespread non-compliance over the years arose as much from confusion and misunderstanding of the filing requirements’ nuances as from willful negligence.
The Foreign Bank Account Report, or FBAR, is FinCen Form 114. The purpose of the report is to inform the IRS of any accounts or other assets you own overseas.
On this form, you must report all your foreign financial accounts. Accounts include brokerage accounts, bank accounts, mutual funds, and more.
This law also requires you to keep specific records on each of these accounts throughout the year. If you fail to comply with any of these FBAR requirements, you may face penalties and fines from the IRS.
Unsure About Your FBAR Filing Requirements – Learn About The Disclosure Rules Now
Why Is It Necessary to File The Fincen Form 114?
If the law requires you to file according to the FBAR instructions, you need to do so. It is not acceptable to “fly under the radar” when it comes to this particular rule. The penalties for failing to file this form or filing with mistakes are harsh and brutal to avoid. Any failure to file an FBAR is easily discoverable by the IRS due to FATCA (the Foreign Account Tax Compliance Act).
Can The IRS See My Bank Account?
FATCA contains provisions that require foreign financial institutions to collect and report certain information about accounts owned by US persons to the IRS, either directly or indirectly. The IRS can easily cross-reference this information with the information provided by taxpayers. Thus allowing them to identify cases in which a taxpayer has failed to meet his or her FBAR filing requirements. Please don’t let the IRS discover your non-compliance before you report it on your own. You will be more likely to face harsh criminal and civil penalties for the violation.
FBAR Filing Deadline – Do I Need To File FBAR Every Year?
As a U.S. taxpayer, everyone knows that April 15th is the tax deadline.
But another vital tax deadline that frequently applies to taxpayers overseas or taxpayers in the U.S. with foreign assets is the FBAR deadline to report foreign bank accounts.
When Should I File FBAR?
The FBAR deadline is April 15th as well. This form has an annual filing requirement. If you cannot file the form before the FBAR filing deadline, there is an automatic FBAR extension to October 15.
If you need to file the form later than October 15, you will need to meet specific requirements to extend the deadline further. For example, if there was a natural disaster, the government may offer an additional FBAR extension.
What Is The FBAR Used For?
The FBAR is a tool to help the U.S. identify persons trying to avoid U.S. tax laws. With FACTA, IRS criminal investigators will use the FBARs to identify or trace funds used for illicit purposes. Also, to uncover unreported income and undisclosed foreign accounts.
FBAR filing is a critical IRS compliance requirement with huge monetary civil penalties at stake and potential criminal consequences. It has ongoing compliance reporting requirements with enforcement teeth behind it. With foreign financial institutions disclosing U.S. account holder information due to FACTA, it’s not one to ignore.
Taxpayers must file the FBAR with the Treasury Department. It is not filed with your federal income tax return whenever you meet the FBAR filing requirements.
The FBAR filing requirements apply whenever a U.S. person has a financial interest in or signature authority over a foreign financial account with an aggregate value of over $10,000 at any time during the calendar year. Financial accounts include a bank account, brokerage account, mutual fund, trust, or other types of foreign financial accounts (including an insurance policy with cash value such as a whole life insurance policy).
Related Filing Requirements
Also, taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS on Form 8938. Unfortunately, while there is duplicate reporting on this additional form. It does not ease you from filing the FBAR Form 114.
Who Needs To File The FBAR?
Not every taxpayer will have an FBAR filing requirement. Yet, if you have any accounts or assets overseas, it is essential to review the filing requirements to determine whether you need to complete and submit this form.
The FBAR instructions state that an individual or entity that meets the classification as a U.S. person will be subject to FBAR filing requirements.
A U.S. person for FBAR reporting purposes includes U.S. citizens and U.S. residents. Section 7701(b) provides two tests to determine a taxpayer’s residency status – the green card test and the substantial presence test.
If the non-U.S. citizen passes either test, they are generally considered a resident. Entities including but not limited to corporations, trusts, estates, partnerships, or limited liability companies created or organized in the U.S. under the laws of the U.S. are a U.S. person.
U.S. Person Filing Threshold
If you are a United States person based on the definition above, you must file an FBAR if:
- You have a financial interest in or any authority over one or more financial accounts located outside the United States AND
- The aggregate value of your foreign financial accounts is more than $10,000 at any time during the calendar year in question (the threshold is the same for every filing status)
For these FBAR requirements, a foreign financial account is an account at a financial institution outside the U.S.
Even if the account does not produce any taxable income during the year, it still has a reporting requirement.
You do not have to be the owner of an account to be responsible for filing an FBAR. Even if you only have signature authority over an account, you must still file this form. This rule often affects employees listed as signatories on employer bank accounts.
Financial Interest Or Signature Authority
A taxpayer has financial interest or signature authority over a foreign financial account if:
- Taxpayer or taxpayer’s agent or representative is the owner of record or holder of the legal title. For example, if the account is for the benefit of the US person or another person’s use, including non-US persons.
- The taxpayer has sufficient interest in the entity that is the owner of record or legal titleholder.
- A taxpayer has authority (alone or with another entity) to control the disposition of account assets.
It is also important to note that the filing threshold is a total value. This means it refers to the total value of all accounts. Even if no single account ever exceeds $10,000 in value during the year. You must still file this form if your accounts’ total is more than $10,000 at any time.
Certain people may be exempt from filing an FBAR even if they meet the requirements listed above. For example, if all of your foreign financial accounts are on a consolidated FBAR, you do not need to file an additional FBAR.
Likewise, if all of your foreign financial accounts have joint ownership with a spouse who is already filing an FBAR, you don’t have to file your own copy of the form. But, be sure to complete and sign FinCEN Form 114a to let your spouse file on your behalf. Keep in mind that your spouse can file on your behalf regardless of your filing status. But you cannot file this form jointly if either of you owns a separate foreign account of any value. If any different accounts exist, you must file separate FBARs.
Which Accounts Are Reportable On The FBAR Filing?
For the purposes of filing an FBAR, the following accounts are “financial accounts”:
- Securities accounts, including brokerage accounts, securities derivatives, and other financial instruments.
- Bank accounts, including checking accounts, savings accounts, and time deposits
- Cryptocurrency, including Bitcoin and the like, especially if:
- Held in a wallet with a non-U.S. company
- A non-U.S. company to convert and transfer one or more virtual currencies such as U.S. dollars to gambling tokens; and vice versa
- Mutual funds or similar pooled funds
- Insurance policies with a cash value, including whole life insurance
- Commodity options or futures accounts
- Any other accounts maintained in a foreign financial institution or with a person or company performing a financial institution’s services.
Any other accounts maintained by a foreign financial institution.
Certain accounts are exempt from FBAR filing requirements. For example, you do not need to report any foreign financial accounts that are:
- Part of a trust of which you are a beneficiary. As long as another U.S. person is already reporting these accounts on an FBAR.
- Held in a retirement plan on your behalf.
- Held in an individual retirement account on your behalf.
- Maintained by a United States Military financial institution.
- Owned by an international financial institution.
- Owned by a government entity.
- Correspondent or Nostro accounts.
Determining The Maximum Value Of An Account
To determine the maximum value of a financial account, you must identify the account’s highest value during the calendar year. The easiest way to do this is to review account statements or to request the amounts from your financial institution.
Please keep in mind that the FBAR is not used to report the total assets in foreign financial accounts. Instead, it reports the maximum value on the different accounts during the calendar year.
What Exchange Rate Should I Use For FBAR?
You must report the maximum value of your account in U.S. dollars. You must translate any foreign currency into U.S. dollars. For the FBAR exchange rate, you must use the Treasury year-end exchange rate.
How To File The FBAR
Unlike your federal tax return, FBAR filing is not to the Internal Revenue Service. Instead, it goes directly to the U.S. Department of Treasury, specifically FinCen.
The FBAR is not sent by mail with your federal tax return. It is done electronically with the Financial Crimes Enforcement Network’s BSA E-Filing System instead.
It is possible to allow another person to file the FBAR on your behalf. However, you must complete FinCEN Report 114a, Record of Authorization to Electronically File FBARs. This form is not sent in with your FBAR filing. Instead, you should keep a copy of it to give to the IRS if necessary.
Can I File FBAR Myself?
Preparing and submitting this form on your own can be daunting. Tax Samaritan can prepare and complete the FBAR reporting electronically on your behalf. This way, you can be sure you follow IRS regulations.
To report accurately on an FBAR form, you must keep specific records of each of your foreign financial accounts. You should keep these records even after you have filed the FBAR in question. It’s important to keep backup documentation so that you can back up your claims in the event of an audit.
For each account reported on the FBAR, you must keep documents that reflect the following information:
- 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 during the year
You can fulfill the FBAR requirements of the law by keeping any document that includes this information. Examples include copies of filed FBARs and bank statements. Be sure to keep the appropriate records for at least five years from the FBAR deadline.
Keep in mind that if you are filing an FBAR because you have signature authority over an account owned by someone else, you are not responsible for keeping records. Instead, the owner of the account will need to collect and maintain the appropriate documents.
What Happens If You Don’t File FBAR By The FBAR Deadline?
If you miss the FBAR filing deadline, you will face the consequences. FBAR filing delinquency can be very, very costly. Civil penalties for non-willful FBAR violations can have a penalty assessment of up to $10,000 per violation, even if the failure resulted from an honest misunderstanding of the rules.
For willful violations, the FBAR penalties soar. The penalty can be up to the greater of $100,000 or 50 percent of the account balance; per violation. Criminal penalties may have fines of up to $500,000 and imprisonment of up to 10 years, along with civil penalties. Unfortunately, ignorance of the rules provides little cover. Ensuring compliance with the regulations offers the only safe way forward.
What Is The Penalty For Not Reporting Foreign Bank Account?
Before 2003, it was the responsibility of FinCen to investigate any crimes related to the FBAR. However, the delegation of this authority is currently with the IRS.
If you fail to file an FBAR and/or keep the proper records when you have a requirement to do so by law, you may be subject to criminal penalties and/or civil monetary penalties.
The amount of FBAR penalties you will owe depends on your specific circumstances. The maximum penalties permissible by law have an annual adjustment for inflation.
Civil Monetary Penalties
Currently, the maximum civil monetary penalties are as follows:
- Negligent violation – $1,166
- Non-willful violation – $13,481 for each negligent violation
- Pattern of negligent activity – $90,743
- Willful failure to file or maintain required records. The greater of 50 percent of the amount in the account at the time of the violation or $134,806.
- Willful failure to file or maintain required records while also violating specific other laws. The greater of 50 percent of the amount in the account at the time of the violation or $100,000.
- Knowingly and willingly falsifying an FBAR. The greater of 50 percent of the amount in the account at the time of the violation or $100,000.
Criminal FBAR Penalties
The maximum criminal penalties that may apply are as follows:
- Willful failure to file or maintain required records. Up to five years in prison, a fine of up to $250,000, or both.
- Willful failure to file or maintain required records while also violating specific other laws. Up to 10 years in prison, a fine of up to $500,000, or both.
- Knowingly and willingly falsifying an FBAR – Up to five years in prison, a fine of up to $10,000, or both.
In the past, it was possible to avoid filing a required FBAR form without facing any consequences because FinCen did not have the resources to enforce filing requirements.
However, the IRS now has the power and third-party information to enforce this law. Taxpayers are no longer able to neglect their FBAR responsibilities without facing severe consequences.
As recently as 2018, one U.S. taxpayer who failed to file required FBARs faced a staggering penalty of $800,000.
Common FBAR Mistakes
The law surrounding FBARs can be tricky, especially when dealing with the other complex tax laws applicable to ex-pats. Below are some of the most common mistakes expat taxpayers make when dealing with the FBAR.
- Misunderstanding the filing threshold. Some ex-pats mistakenly believe that they don’t need to file an FBAR form as long as none of their accounts reach $10,000 during the year. In some cases, expats will even go out of their way to prevent any account from reaching this balance. However, because the FBAR threshold is based on your accounts’ aggregate balance, individual balances are not important. If the total of all accounts is ever greater than $10,000 during the year, you must file an FBAR.
- You are thinking that the law only applies to bank accounts. Bank accounts are not the only assets that have a reporting requirement on the FBAR. The rule applies to many different types of foreign financial accounts and assets, including life insurance policies with cash value, mutual funds, and more. If you aren’t sure whether your accounts are subject to FBAR reporting, you need to consult an expat tax professional.
- Believing that ownership of the account matters. FBAR filing requirements apply even when you are not the owner of the account. If you have any authority over a foreign financial account and you meet the filing threshold, you must submit this form.
- Assuming the FBAR doesn’t apply for minor children. There is no filing exception for minors. A child must also file the FBAR if the filing requirement applies.
More Common FBAR Filing Errors
- Thinking the government won’t notice the missing forms. Some ex-pats mistakenly believe that they don’t need to file an FBAR. The government has measures in place to make sure that United States taxpayers follow the law. Suppose you fail to file a required FBAR. In that case, the United States government will cross-reference the information (or lack thereof) provided by you with the information it receives from foreign financial institutions holding your accounts. After it becomes clear that you have not filed the required forms, you will face civil and criminal penalties. If you have ever filed an FBAR form in the past, you are now in the FinCen database. You are making it even easier to track your activity.
- Do you pay taxes on FBAR? Believing that an FBAR requires payment. In some cases, holding foreign financial accounts may subject you to income taxes. However, merely having a requirement to file an FBAR does not mean that you will need to pay more. Many ex-pats must file this form each year but will not need to pay any taxes on these accounts’ income, depending on their type and the total amount of worldwide income.
- You are thinking that the penalties for failing to file an FBAR won’t be that bad. The penalties for failing to file a required FBAR can be significant. This could be true even if you were not aware of your filing responsibilities. In fact, in some cases, the IRS may accuse you of “willful blindness” if you fail to learn about your filing requirements. Both the monetary and criminal penalties related to failure to file are frightening. With some taxpayers spending up to ten years in prison and owing hundreds of thousands of dollars for their crimes, it is scary.
- Assuming an FBAR is not required if there is no individual tax return filing requirement. Even if there is no return filing requirement, an FBAR must be filed when the FBAR filing requirements are met.
Omitted Account Mistakes
- Not reporting foreign pension accounts. Generally, foreign pension accounts are reportable on the FBAR.
- Not reporting FBAR crypto (cryptocurrency). While there is no definitive guidance on whether FBAR crypto is reportable (although guidance is expected to be forthcoming stating that cryptocurrency is reportable), a conservative (aka “safe”) approach would be to report. In fact, recently, FinCEN has now announced (FinCEN Notice 2020-2) an intention to amend the rules to require FBAR disclosures for a virtual currency like Bitcoin.
- Not reporting business accounts. All foreign accounts, business and personal must be reported.
And The Biggest Misconception
- Believing the IRS won’t be able to collect. Some taxpayers believe that even if they are caught, and there is a penalty assessment, the IRS won’t enforce collection. The IRS statute of limitations on assessing FBAR penalties is six years. Thus far, taxpayers’ attempts to use the 8th Amendment to avoid excessive fines related to FBAR violations have failed. Also, the IRS has the ability to attach to your income and assets to recover outstanding FBAR penalties and to freeze your passport.
What To Do If You Haven’t Filed
In some cases, United States persons who need to file an FBAR form are unaware of their responsibilities under the law or cannot file the required forms by the deadline.
If you learn that you have one or more delinquent FBARs, you need to take action as quickly as possible.
The IRS recommends that any United States person who has learned that they need to file an FBAR form in a previous year should file the document electronically as soon as possible using the BSA E-Filing System website. When using the system, you will be able to enter the calendar years you are reporting, as well as an explanation of the form’s delinquency.
If the IRS determines that you had reasonable cause for filing the form late, there will not be a penalty assessment.
However, if you know that you have delinquent FBARs, it is best to consult a tax professional to ensure you have all the information you need to minimize the risk of FBAR penalties.
FBAR Voluntary Disclosures
If you are a U.S. person with previously undisclosed interests in foreign financial accounts and assets, you would have been able to participate in the IRS offshore voluntary disclosure program up until September of 2018.
This program existed to allow taxpayers to deal with delinquent forms and taxes without facing many negative consequences. Unfortunately, the IRS has since closed this program.
About The New Voluntary Disclosure Procedures
The IRS released a memo in November of 2018 that details the new procedures used to deal with the voluntary disclosure of offshore assets. Several things have changed under these new procedures.
- The taxpayer must provide more information. Under the new voluntary disclosure procedures, taxpayers must make a preclearance request to the IRS Criminal Investigation Division and then submit significant details about their assets.
- More tax years are subject to examination. More tax years are now subject to civil examination as well. The previous OVDP capped the number of tax years subject to examination at eight. But the new procedure establishes no such cap, allowing the IRS to examine as many tax years as they want.
- No fixed penalties. While the previous OVDP imposed a specific penalty for participants, the new procedures do not include a fixed penalty, making voluntary disclosure much more uncertain for taxpayers. Instead, penalties are imposed following the Internal Revenue Manual guidelines and will be based on the examiners’ discretion.
- Civil fraud penalties are required. The new voluntary disclosure procedures mandate the assessment of a civil fraud penalty for taxpayers. Taxpayers can argue for a lesser penalty. But the new procedures state that the civil fraud penalty will be waived only if the circumstances are considered “exceptional.”
- Taxpayers can appeal liabilities. Under the previous OVDP, taxpayers could not appeal liabilities imposed concerning voluntary disclosure. However, taxpayers can now appeal these liabilities under the new procedures.
Streamlined Filing Procedures
Voluntary disclosure is not the only option available to taxpayers who have failed to submit required FBARs. The IRS also offers a Streamline Filing Compliance Procedure, as well as the Delinquent FBAR Submission Procedures.
In cases where taxpayers do not have accounts with large balances and/or accounts associated with significant unreported income, these options may be better.
There are various considerations before taxpayers should determine whether to pursue a voluntary disclosure through the new voluntary disclosure procedure, amending or filing delinquent FBARs, or in some other manner.
While Tax Samaritan can prepare all your required FBAR forms for all years, we recommend a free consultation with one of our recommended attorneys after your FBARs have been prepared to explore recommended options for disclosure.
Streamlined Filing Compliance Procedures
If you are a United States ex-pat living and working in a foreign country, the chances are that you are required to file an FBAR form.
Unfortunately, many expats mistakenly believe that they are exempt from United States tax law because they are no longer earning money in the United States. This can lead to significant problems, including delinquent FBARs, delinquent income tax returns, back taxes, and much more.
Expat Tax Requirements
As an expat, it is vital to understand your tax requirements to avoid problems with the IRS. However, it is difficult for expats from the United States to understand their responsibilities as taxpayers living abroad in many cases.
For example, in addition to filing an FBAR, you must also adhere to all other federal income tax filing and payment requirements. Even if you are no longer earning any income from U.S. sources, you may still be required to file an income tax return every year. Some ex-pats may even be required to pay income tax to the United States.
Fortunately, the IRS also offers certain tax benefits and advantages to expats, such as the Foreign Earned Income Exclusion and Foreign Tax Credit. These tools can help you reduce your U.S. tax liability and/or prevent you from paying taxes twice on the same income.
The tax laws and requirements imposed on United States expats are complex. Thus, it is best to consult an ex-pat tax professional who understands these laws and can help you ensure you are in full compliance while simultaneously minimizing the amount you owe the IRS.
How Tax Samaritan Can Help
Tax Samaritan specializes in expat tax preparation and resolution.
If you believe you may be subject to FBAR reporting requirements, you need to ensure you comply. Tax Samaritan can review your situation and help you determine whether you need to complete these forms. We can also help you prepare these forms accurately and submit them properly.
Even if you have already failed to file one or more FBARs, Tax Samaritan can still help. We have experience with all of the resolutions available to taxpayers with delinquent FBARs, and we can advise you about each option.
Once you know how you would like to proceed, we can guide you through the process to face as few negative consequences as possible. Tax Samaritan is also happy to help you with all of your other expat tax needs, including income tax preparation and compliance.
Whether you are a taxpayer who has recently moved overseas or have been living as an ex-pat for many years, Tax Samaritan has the knowledge and experience to assist you. Please contact us today to learn more.