As you may be aware, federal tax law requires US citizens and resident aliens to report any worldwide income on US tax returns, even if they live abroad. That includes income from foreign trusts and foreign bank and securities accounts. In these cases, affected taxpayers need to complete and attach Schedule B to their tax return. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires US citizens to report the country in which each account is located. However, an expats tax filing obligation do not end at reporting the income from foreign accounts.
In addition to reporting the income items from foreign banks and financial institutions on their tax returns, all US persons who have a financial interest or signature authority over anyone or multiple foreign financial accounts wherein the value is over $10,000 any time during the US tax year, must file FinCEN form 114 (known as Foreign Bank Account Reporting, or FBAR) each year.
Who is a US person?
- Legal Resident
- Green Card Holder
- H1b Visa Holder
- L1 Visa Holder
- A trust formed under the laws of the United States
- An estate formed under the laws of the United States
- An entity created or organized in the United States under the laws of the US government
What accounts are reportable and what foreign financial accounts are included?
Accounts that may require reporting include, but are not limited to:
- Bank accounts (savings, demand, checking, deposit, or any other account maintained with a financial institution)
- Securities or brokerage accounts
- Mutual funds
- Debit and prepaid credit cards maintained with a financial institution
- Certain types of annuities or pension accounts
- Retirement plans including Registered Retirement Savings Plan (RRSP) accounts
- Interests in partnerships, trusts, or other pass-through entities that have foreign accounts
- Insurance policies with cash surrender value(s)
The due date to file FBAR forms for tax year 2018 is April 15, 2019 as well, although there is an automatic extension is until October 15, 2019. Note that a request for an extension is not required for the FBAR (though it is for the tax return itself).
In addition, certain taxpayers may also have to complete and attach to their return Form 8938, Statement of Foreign Financial Assets. Generally, US citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on this form if the aggregate value of those assets exceeds certain thresholds. See the instructions for this form for details.
While Form 8938 is similar in terms of FBAR reporting, it can add to the time required to prepare and review a tax return before filing.
Are FBARs only required for expats?
While expatriates generally have FBAR filing requirements, some domestic taxpayers will also need to file FBARs. For example, if you’re a US citizen who once lived abroad, perhaps you have foreign bank accounts that remain open. Or, maybe you inherited some money or other income-producing property in a foreign country and had to open a bank account in that country to receive the funds. These are just some examples, but it’s important to note that the FBAR isn’t just for expatriates, it is for anyone with interest in a foreign account.
What constitutes “interest in a foreign account” that would require FBAR reporting?
While direct ownership of a bank or securities account is likely the primary accounts that come to mind when determining FBAR reporting requirements, it is important to know that there are other requirements for filing. If you’re the join owner of a foreign account, you must still file and FBAR. Also, if you have signature authority over an account, you also need to file. A person with signature authority is any person who has authority “(alone or in conjunction with another), to control the disposition of money, funds, or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained.”
What information is needed to prepare an FBAR?
In order to complete the FBAR form you will need:
- Your name, Social Security Number or ITIN, and address
- The name, address, and social security number (if any) of all joint owners of the account
- Your foreign banks’ names and addresses
- The type of account – bank, securities, or other
- Your foreign bank account number for each account
- The maximum balance of your foreign financial account during the year converted to US dollars
Are there penalties if I fail to comply with FBAR filing requirements?
Currently, under existing FBAR rules, if you’re a person who non-willfully fails to report foreign accounts, there is a penalty of up to $10,000 per violation. However, willful violations can lead to penalties up to $100,000 or 50% of account balances. Criminal penalties may also be applicable for willful violators.
What else should I be aware of?
One point to be cognizant of is that the IRS requires most tax information to be in US currency, so conversions of the foreign amounts to US equivalents must be completed. It is also important to point out that the information needed to complete FBAR and related filings may not be quickly and readily attainable. Foreign accountants, brokerages, banks, and other people or organizations may need to be contacted and consulted. This can often take time and resources, and communication may or may not be easy, so it is important to know what your requirements are and to plan accordingly.
If I was required to file FBARs previously but didn’t, is there anything I can do now?
If you were required to file FBARs in prior years but failed to do so, thankfully there is a program, called the Streamlined Filing Program, that the IRS offers that can help you get back into compliance. You will want to consider using streamlined filing compliance procedures if any of the following apply to you:
- If you unknowingly skipped declarations of your foreign assets and accounts
- If you have made mistakes with filing FBAR forms in the past
- If you have not already reported all your US tax returns and paid tax on the income from all the foreign financial accounts you’ll be naming in your FBAR declaration
Streamlined Filing allows you to report or amend 3 years of tax returns and 6 years of unreported FBAR statements without incurring a penalty. It is, however, not a very straightforward process and should be handled delicately, which is why it’s best that you seek professional guidance for Streamlined Filings. Fortunately, Greenback has a team of streamlined filing experts who can help you take the worry out of catching up with our Streamlined Filing Package.
Need help with FBAR reporting, or have additional questions?
If you need to file an FBAR, Form 8938 or other related forms, or maybe you just need help knowing where to begin, the Greenback team can help you get in the information you need. Contact us today and let us take the hassle out of filing your expat taxes.