It is tax season again, and according to U.S. law, all United States citizens (including green card holders) have an obligation to pay taxes on their worldwide income, regardless of where they live.
In addition, in cases where you own foreign financial account(s) outside of the United States and the aggregate value of the account(s) exceeds $10,000 at any time during the calendar year, you also have to file a Report of Foreign Bank and Financial Accounts form, (FinCen 114 Report, commonly known as the FBAR). This requirement exists even if those account(s) did not generate any taxable income during the year and even if you only have signatory authority on the account(s). The FBAR form is separate from the income tax return.
Deadline for reporting:
The deadline for filing the FBAR is the same as the deadline for filing a federal income tax return, which is April 15th. If the federal income tax due date falls on a Saturday, Sunday, or legal holiday, the due date is delayed until the next business day.
If one misses the FBAR deadline there is an automatic extension until October 15 to file the FBAR, and a specific extension request is not required. (In the past, the FBAR deadline was June 30 and no extensions were available).
Who needs to file an FBAR:
In general, any U.S. person who has a financial interest or signatory authority over foreign (outside of the United States) financial account(s) and the aggregate value of the foreign account(s) exceeds $10,000 at any time during the calendar year.
Children: In general, a child is responsible for filing his or her own FBAR report. If a child cannot file his or her own FBAR for any reason, such as age, the child's parent, guardian, or other legally responsible person must file it for the child. If the child cannot sign his or her FBAR, a parent or a guardian must electronically sign the child's FBAR.
Jointly owned accounts: If two or more U.S. persons own a foreign account jointly, then each of them is considered to have a financial interest in that account and is required to report the entire value of that account on an FBAR.
Spouses: spouses don’t need to file separate FBARs if:
All reportable foreign financial accounts are jointly owned with their filing spouse, and;
The filing spouse reports all the jointly-owned accounts on a timely filed FBAR.
If both requirements above apply, each spouse needs to fill out a special form (FinCen 114a Report - Record of Authorization to Electronically File FBARs) designating one of them to file the FBAR form on behalf of both of them. This form is not submitted with the FBARs but needs to be kept with other financial and tax records.
If both requirements apply, each spouse will need to file a separate FBAR, reporting the entire value of the jointly owned accounts
The definition of a foreign financial account and exceptions to the filing requirement:
A foreign account is any account located outside of the United States. An account maintained with a branch of a foreign bank that is physically located in the United States, is NOT a foreign financial account and thus does not need to be reported on the FBAR.
A financial account includes but is not limited to securities, brokerage, saving, checking, deposit, time deposit, pension, Keren Hishtalmut, commodity futures or option accounts, an insurance policy or an annuity policy with cash value, and shares in a mutual fund or a similar pooled fund or any other account maintained with a financial institution.
Some exceptions of non-filing include but are not limited to foreign accounts of U.S. government entities, IRA owners and beneficiaries and participants in and beneficiaries of tax qualified retirement plans. Furthermore, there are certain individuals that will not have to file an FBAR if they have only signatory authority but no beneficial interest in the account and it is best to check the full list of exceptions detailed in the FBAR filing instructions.
What needs to be reported on an FBAR:
The requirement is to report the maximum value of the account during the calendar year. Record all amounts in U.S. dollars rounded up to the next whole dollar. For conversion purposes, you need to use the U.S. dollar exchange rate for the last day of the calendar year. The IRS FBAR Reference Guide has examples of how to report account values. In addition, the Financial Crimes Enforcement Network (FinCen) website has steps for reporting maximum account values.
There is a requirement to retain all financial information, which includes the name and address of the financial institution where the account is maintained, the account number and name on the account, the type of account and the maximum value. The information should be retained for a period of 5 years following the calendar year reported in case a request is made to inspect the financial records.
Penalties for not filing an FBAR:
U.S. taxpayers who do not file the required FBAR may be subject to criminal and civil penalties.
A U.S. taxpayer who willfully fails to file an FBAR may be subject to a penalty, the greater of $124,588 or 50% of the total balance of the foreign account per violation. In addition, failing to file an FBAR could subject a person to a prison term of up to 5 years in addition to a fine.
A non-willful violation may be subject to a $12,459 penalty per account.
The IRS will not impose a penalty on taxpayers who properly reported their foreign financial accounts on a late-filed FBAR and the IRS finds that they had reasonable cause for doing so.
It should be noted that there are options of filing a late FBAR for a previous year and for amending an FBAR and they are explained on the BSA E-Filing System.
Form 8938 and the FBAR requirement:
Certain U.S. taxpayers need to file form 8938, (Statement of Specified Foreign Financial Asset), as part of their income tax return, but this does not relieve them of their separate obligation to also file an FBAR form although some of the information is similar, resulting in reporting the foreign accounts on both forms. You can find a comparison of Form 8938 and the FBAR requirement by clicking on the following link.
The content of this article is intended to provide a general guide to the subject matter and is not a substitute for legal consultation. Specific legal advice should be sought in accordance with the circumstances.