Whether you live inside or outside the United States, you may be required to file FBAR if you have assets or accounts based in a foreign country. Below is some information to help you determine whether you need to file FBAR, understand the process and complete it successfully.
What Is The FBAR?
In the past, some taxpayers have tried to avoid paying what they owe to the United States Government 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 United States persons.
The Foreign Bank Account Report, or FBAR, is FinCen Form 114, Report of Foreign Bank and Financial Accounts. The purpose of the report is to inform the Internal Revenue Service of any accounts or other assets you own overseas. FBAR was created as part of the Bank Secrecy Act, which is designed to prevent taxpayers from being able to avoid paying taxes by hiding assets overseas.
On this form, you will be required to report all of your foreign financial accounts, including 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 meet any of these requirements, you may face penalties and fines from the IRS, as well as criminal penalties.
Unsure About Your FBAR Filing Requirements – Learn About The FBAR Rules Now
Why Is It Necessary to File an FBAR?
If the law requires you to file an FBAR, you need to do so. It is not a good idea to try to “fly under the radar” when it comes to this particular requirement. The penalties for failing to file this form or filing the form incorrectly are harsh and difficult to avoid. In addition, because of the Foreign Account Tax Compliance Act, or FATCA, any failure to file an FBAR is likely to be discovered quickly by the IRS.
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, allowing them to identify cases in which a taxpayer has failed to meet his or her FBAR filing requirements. If the IRS discovers your noncompliance 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 – When To File The FinCen Form 114
As a U.S. taxpayer, everyone knows that April 15th is the tax deadline. But another important tax deadline that frequently applies to taxpayers overseas or taxpayers in the U.S. with foreign assets, is the FBAR (Foreign Bank Account Report – FinCen Form 114 – formerly known as TD F 90-22.1 ) deadline to report foreign bank accounts.
The FBAR filing deadline is April 15th as well. This form must be filed every year. If you are not able to file the form before the due date, the IRS will extend the deadline to October 15, which is the same standard six-month extension available for your income tax return.
If you need to file the form later than October 15, you will need to meet certain requirements in order to extend the deadline further. For example, if you have been affected by a natural disaster, the government may offer an additional extension.
FBAR Filing Requirements
The FBAR is a tool to help the United States government identify persons who may be, in the view of the IRS, using foreign bank accounts to circumvent United States law. With FACTA, IRS criminal investigators will use the FBARs to help them identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad as well as undisclosed foreign accounts.
This is an important IRS compliance requirement with huge monetary civil penalties at stake as well as potential criminal consequences. It has ongoing compliance reporting requirements with enforcement teeth behind it with foreign financial institutions starting to disclose U.S. account holder information as a result of FACTA.
The FBAR must be filed with the Treasury Department (it is not filed with your your federal income tax return) whenever you meet the FBAR filing requirements, which in a nutshell is whenever a U.S. person has a financial interest in, or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust or other type of foreign financial account (including an insurance policy with a cash value such as a whole life insurance policy) maintained with a financial institution, with an aggregate value of over $10,000 at any time during the calendar year based on the highest value of each foreign account during the tax year.
In addition, taxpayers with specified foreign financial assets that exceed certain thresholds must also report those assets to the IRS on Form 8938 as well. Unfortunately, while there is a duplicate reporting on this additional form, it does not alleviate you from filing the FBAR Form 114 (formerly known as Form TD F 90-22.1).
Who Must file The FBAR
Not every taxpayer will be required to file an FBAR. However, if you have any accounts or assets overseas, it is important 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 United States person will be subject to FBAR filing requirements. A U.S. person for purposes of FBAR reporting includes U.S. citizens, U.S. residents (Section 7701(b) provides two tests used to determine a taxpayer’s residency status – the green card test and 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 that were created or organized in the U.S. under the laws of the U.S.
If you are classified as 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
For the purposes of these requirements, a foreign financial account is any account held at a financial institution located outside the United States. Even if the account did not produce any taxable income during the year, it will still be considered a foreign financial account for the purposes of the FBAR.
You do not have to be the owner of an account in order to be responsible for filing an FBAR. Even if you only have signature authority over an account, you must still file this form. This requirement often affects employees listed as signatories on employer bank accounts.
It is also important to note that the filing threshold is an aggregate value, which means it refers to the total value of all of your accounts. Even if no single account ever exceeds $10,000 in value during the year, you must still file this form if the total of your accounts 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 already reported on a consolidated FBAR, you do not need to file an additional FBAR. Likewise, if all of your foreign financial accounts are owned jointly with a spouse who is already filing an FBAR, you don’t have to file your own copy of the form. However, be sure to complete and sign FinCEN Form 114a to authorize your spouse to 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 separate accounts exist, you must file separate FBARs.
Which Accounts Are Included In FBAR Filing?
For the purposes of filing an FBAR, the following accounts are considered “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 is used to convert and transfer one or more virtual currencies such as U.S. dollars to gambling tokens and vice versa
- Mutual funds
- Insurance policies with a cash value, including whole life insurance
- Commodity options or futures accounts
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 listed as 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 greatest value during the calendar year. The easiest way to do this is by reviewing periodic account statements, as long as these statements reflect the account’s maximum value accurately or request from your financial institution.
How To File The FBAR
Unlike your federal income tax return, your FBAR is not submitted to the Internal Revenue Service. Instead, it goes directly to the U.S. Department of Treasury.
FBAR should not be mailed in with your federal income tax return. Effective July 1, 2013, all FBARs must be electronically filed with the Financial Crimes Enforcement Network’s BSA E-Filing System instead. If you want to file the FBAR on paper, you must have special permission from the IRS, which can be obtained by calling FinCEN’s Regulatory Helpline. If your request is granted, you will receive a paper form in the mail that can be completed and submitted to the IRS.
It is possible to authorize another person to file FBAR on your behalf. However, you must complete FinCEN Report 114a, Record of Authorization to Electronically File FBARs. This form should not be filed with FBAR. Instead, you should simply keep a copy of it to give to the IRS if necessary.
Preparing and submitting this form on your own can be daunting. However, Tax Samaritan can both prepare and complete the FBAR reporting electronically on your behalf so you can be sure you are in compliance with IRS regulations.
Keeping Records For The FBAR
To report accurately on an FBAR, 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 so 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 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 documents for at least five years from the FBAR in question’s due date.
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 keep the appropriate documents.
FBAR Late Filing And Non Filing
If you miss the FBAR deadline, you will face consequences. Civil penalties for non-willful FBAR violations can be imposed up to an amount of $10,000 per violation. For willful violations the penalty can be up to the greater of $100,000 or 50 percent of the account balance, per violation. Criminal penalties can result in fines of up to $500,000 and imprisonment of up to 10 years and may be imposed in conjunction with the civil penalties.
Specific Penalties For Failing To File An FBAR
Before 2003, it was the responsibility of the Financial Crimes and Enforcement Network to investigate any crimes related to the FBAR. However, this authority has since been delegated to the IRS.
If you fail to file an FBAR and/or keep the proper records when you are required to do so by law, you may be subject to criminal penalties and/or civil monetary penalties. The amount of penalties you will owe depends on your specific circumstances. The maximum penalties allowed by law are adjusted annually based on inflation.
Currently, the maximum civil monetary penalties are as follows:
- Negligent violation – $1,078
- Non-willful violation – $12,459 for each negligent violation
- Pattern of negligent activity – $83,864
- 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 $124,588.
- Willful failure to file or maintain required records while also violating certain 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.
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 certain 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 without facing any consequences because FinCen did not have the resources to enforce filing requirements. However, because the IRS now has the power to enforce this law, taxpayers are no longer able to neglect their FBAR responsibilities without facing serious consequences. In fact, 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 complicated, especially when you are already dealing with the other complex tax laws that apply to expats. Below are some of the most common mistakes expat taxpayers make when dealing with the FBAR.
- Misunderstanding the filing threshold. Some expats mistakenly believe that they don’t need to file an FBAR 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 the aggregate balance of your accounts, 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.
- Thinking that the law only applies to bank accounts. Bank accounts are not the only assets that must be reported on an FBAR. The law 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 must be reported, 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.
- Thinking the government won’t notice the missing forms. Some expats mistakenly believe that they don’t need to file an FBAThe government has measures in place to make sure that United States taxpayers follow the law. If you fail to file a required FBAR, 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 both civil and criminal penalties.In addition, if you have ever filed an FBAR in the past, you are now in the FinCen database, making it even easier to track your activity.
- Believing that an FBAR requires payment. In some cases, holding foreign financial accounts may subject you to income taxes. However, simply being required to file an FBAR does not mean that you will need to pay more. Many expats are required to file this form each year but will not need to pay any taxes on income earned by these accounts.
- 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, 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.
- Believing the IRS won’t be able to collect. Some taxpayers believe that even if they are caught and penalties are assessed, the IRS won’t be able to enforce collection. The IRS statute of limitations on assessing FBAR penalties is six years. Thus far, any attempts by taxpayers to use the 8th Amendment to avoid excessive fines related to FBAR violations have failed. In addition, the IRS has the ability to attach to your income and assets in order to recover outstanding FBAR penalties.
What To Do If You Haven’t Filed
In some cases, United States persons who need to file an FBAR are unaware of their responsibilities under the law or simply are not able to 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 he or she needs to file an FBAR 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, no penalties will be imposed. However, if you know that you have delinquent FBARs, it is best to consult a tax professional to make sure you have all the information you need to minimize the risk of 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 as 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 that will be used to deal with voluntary disclosure of offshore assets. Several things have changed under these new procedures.
- 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 examined. 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 in accordance with the guidelines in the Internal Revenue Manual and will be based on the discretion of the examiners.
- 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 in relation to 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, through 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 expat living and working in a foreign country, chances are that you are required to file an FBAR. 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 important to understand all of your tax requirements so you can avoid problems with the IRS. However, in many cases, it is difficult for United States expats to understand their responsibilities as taxpayers living abroad. 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 expats 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.
Because the tax laws and requirements imposed on United States expats can be so complicated, it is best to consult an expat tax professional who understands these laws and can help you make sure 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 make sure you are in compliance. 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 with regard to each option. Once you know how you would like to proceed, we can guide you through the process so you will 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 you have been living as an expat for many years, Tax Samaritan has the knowledge and experience to assist you. Please contact us today to learn more.