This article was first published on April 18, 2012. It was updated on July 10, 2014, with information relevant to the 2013 and 2014 tax years.
While some are unaware of the obligation or choose to ignore it, many US citizens who live abroad are obligated to file an annual report of their foreign bank and financial accounts with the US Department of the Treasury. This report is called the Report of Foreign Bank and Financial Accounts and is commonly referred to as the foreign bank account report or FBAR.
The FBAR was devised as part of the Bank Secrecy Act of 1970 as a means to discourage and prevent tax evasion. While the FBAR has long been unheard of or ignored by individuals with foreign-held assets, the United States government is stepping up efforts to investigate and prosecute individuals who fail to comply with the reporting requirements.
If you’re an expat with foreign accounts or an expat who’s been delinquent or noncompliant in the past, you need to be aware of how the FBAR affects you and the options you have for either avoiding penalties or getting current. This guide will explain everything you need to know about the FBAR, including who needs to file, how to file, and when to file as well as information about related topics like the Foreign Account Tax Compliance Act (FATCA) and the Offshore Voluntary Disclosure Initiative (OVDI).
Who Needs to File the FBAR?
Basically, anyone with $10,000 or more (USD equivalents included) in a foreign bank or financial account at any point during the calendar year will be required to file Form 90-22.1. This means that if you have a checking account in France with a steady balance of $9,950 but the account contains an extra $50 for a day, you will still be required to report that account on the FBAR, as well as any other foreign accounts you have.
It is also important to note that FBAR filing requirements apply to the aggregate balance — meaning that the $10,000 does not have to be in one account but can be spread out over multiple accounts. If you have five foreign bank accounts each with $2,000, you will have to report the accounts on your FBAR.
The IRS says that the FBAR is required for “United States persons” who meet the reporting threshold. The term “US persons” refers to citizens, resident aliens, trusts, estates, and domestic entities. FBAR filing requirements apply to joint accounts as well, because they apply to persons with financial interest in or signature authority over the foreign account(s). “Financial interest” is determined based upon who is the owner of record or legal title. “Signature authority” means that you have some level of control over the disposition of assets through direct communication with the institution.
What Needs to be Filed? Reporting Information on FinCEN Form 114:
Recordkeeping is the most essential aspect of keeping up with your yearly FBAR obligations. Submitted forms must contain the following information:
- The maximum value (converted to USD using the end of year exchange rate) of each account during the reporting period,
- The name on the account(s),
- The number/other designation of the account,
- The type of account, and
- The name and address of the institution or other person with whom the account is maintained
Many expats also find that they have to file one year and not the next. For this reason, it is important to make good recordkeeping a habit. Your FBAR will be filed on FinCEN 114 and submitted to the Treasury, not the IRS.
When to File: Deadlines and Submission Details
The FBAR must be filed by June 30th every year and no extensions are available. As of July 1, 2013, all filings MUST be done electronically. No paper returns will be accepted anymore. The new BSA E-Filing System has made filing much less of a hassle.
Update: Mandatory e-filing of the FBAR goes into effect in 2013. Have a look at our blog post on this for more details.
Why You Should File the FBAR: Penalties and the Foreign Account Tax Compliance Act (FATCA)
Penalties for FBAR noncompliance can be severe — violators can be charged civilly, criminally, or both. Negligent or non-willful violations have civil penalties of up to $500 and $10,000 respectively, and no criminal penalties will be assessed. The civil penalty for willful noncompliance is up to $100,000, and criminal penalties of up to $250,000 or 5 years in prison or both can and will be assessed in addition. If you are found to be breaking certain other laws, the penalties could escalate to up to $500,000 or 10 years in jail or both.
However, in June 2014 the IRS revised the regulations of the Streamlined Procedures, which waives all late filing and FBAR penalties for those whose lack of filing was non-willful. This means you weren’t purposely hiding money overseas in an effort to avoid paying US taxes. There are no other restrictions to filing under the Streamlined Procedures, so this is a great option if you are behind on tax return and FBAR filings.
The Foreign Account Tax Compliance Act (FATCA)
Many people have been comfortable evading the FBAR (and, likely, a portion of their income taxes) in the past because it has been hard for the IRS to track down violators. The FBAR is required for US citizens because foreign banks don’t have the same reporting requirements as institutions in the US, but this fact also makes it harder for the US to investigate potential noncompliance cases. The Foreign Account Tax Compliance Act (FATCA) is changing all of that, however. FATCA requires individuals or businesses with foreign accounts meeting the reporting threshold of $50,000 to file Form 8938 with the IRS.
Form 8938 is different from the FBAR on multiple levels — it’s filed with the IRS as part of your tax return, the reporting threshold is higher — but the most important difference is that FATCA also requires foreign financial institutions (FFIs) to report directly to the IRS regarding information about financial accounts held by US taxpayers. This means that, yes, there is a way for the government to find out about your unclaimed or unreported foreign assets.
Is There an Amnesty Program? Information About the Offshore Voluntary Disclosure Program (OVDP)
The IRS is currently running its third Offshore Voluntary Disclosure Initiative. The Offshore Voluntary Disclosure Program (OVDP) is more or less an amnesty program that allows noncompliant taxpayers to come forward. In exchange for filing all amended tax returns, all FBARs and paying all back-taxes, individuals taking advantage of the Offshore Voluntary Disclosure Program will receive reduced penalties for their former noncompliance and avoid criminal prosecution.
The 2012 OVDP framework is about the same, but the penalties have increased since 2011. In addition to filing all original and amended returns and paying all back-taxes and interest for up to 8 years, participants will have to pay a penalty of 27.5 percent of the highest aggregate balance in the foreign bank accounts during the eight years preceding the disclosure. This is up from 25 percent in 2011. Some individuals will be eligible for 5 or 12.5 percent penalties, depending on the circumstances. According to the IRS, participants in “limited situations” can qualify as well as those whose offshore accounts did not exceed $75,000. Thus far, US citizens living abroad have been given additional leniency and have been able to avoid all penalties if they voluntarily come forward.
Questions About Your FBAR?
Take a look at our updated blog post about the 2012 Offshore Voluntary Disclosure Program. If you have questions about your FBAR or the Offshore Voluntary Disclosure Program, or if you would like to learn about our expat tax services, please contact us.