While filing US tax returns is a well-known responsibility of Americans living abroad, requirements such as the Foreign Bank Account Report (FBAR) are often forgotten. What’s the big deal, you ask? Well, failing to file the FBAR can draw the attention of the IRS, and lead to some harsh penalties. To make sure you stay compliant (and off the IRS’ radar!), we have compiled the things you need to know about FBAR reporting!
What Is FBAR?
FBAR (Foreign Bank Account Report) was created as part of a US initiative to uncover tax cheats hiding money in offshore accounts. FBAR has been around for years but hasn’t been strictly enforced by the IRS–until a few years ago. With this new initiative, the IRS is forcing those with money in overseas bank accounts to disclose those accounts if balances exceed the threshold. Keep in mind that those filing FBAR aren’t taxed on the balance of the accounts or anything of the sort–it’s truly just a reporting requirement so that the IRS knows what money lies overseas.
Why Should I Care About FBAR?
While the FBAR was previously ignored by individuals with foreign-held assets, the United States government has stepped 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).
Who Needs to File?
Any US person (that is, any person considered a US tax resident) with a foreign account balance of $10,000 or more at any point during the tax year will need to file. And this is triggered even if the balance hit $10,000 for just one day (or one minute!). The threshold is also an aggregate amount–meaning, if you have multiple accounts, the total balance of all of your accounts is what would trigger a filing requirement. So, if you are thinking that keeping $4,000 in one account and $7,000 in another will enable you to avoid filing, this isn’t the case.
FBAR also applies to those who simply have signing authority over an overseas account. That’s important to remember, as the account doesn’t have to be your account. Signature authority means the authority of an individual to control the disposition of money, funds, or other assets held in a financial account by direct communication to the institution with which the financial account is maintained. So, for example, if you were a signatory on one of your employer’s bank accounts, this account should be reported on your FBAR form.
FBAR Applies to All US Persons, Not Just Citizens
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.
Report Joint Accounts, Too
FBAR filing requirements apply to joint accounts as well, because they apply to persons with a 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?
The largest number of FBAR filers will just be reporting their foreign bank account balances. However, you must also report:
- Foreign stock or securities held in a financial account at a foreign financial institution (the account itself must be reported, but the contents of the account do not need to be reported separately)
- Financial account held at a foreign branch of a US bank
- Foreign mutual funds
- Foreign-issued life insurance or annuity contract with a cash value
Good Records Are the Key to Simplified FBAR Filing
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.
How Do You File?
This process is different than filing your Federal Tax Return. FBAR is filed separately to the Department of the Treasury–not the IRS. It used to be filed via TD 90-22.1 by mail, but now you use FinCEN 114 and submit it electronically through the BSA e-filing site. The process is pretty straightforward and requires you to gather all pertinent account information and enter it into the online system. You can have a third party prepare it for you (i.e., a certified tax preparer), but you must file FinCEN 114a to give the party authority to do so. This form is also necessary if you hold joint accounts. Your spouse would sign this form to allow you to file on their behalf. Keep in mind that if your spouse has other accounts you are not on that he or she needs to file (i.e., individual accounts), they must file their FBAR separately (including the FBAR for your joint account).
When to File: FBAR Deadlines
The FBAR must be filed by April 15th every year. If you miss this deadline, it can be extended automatically to October 15th.
What Are the FBAR Penalties for Not Filing?
For those whose lack of filing was non-willful (meaning you didn’t know about your reporting obligation), the fine can be $12,921 per violation. If it is determined that you purposely avoided filing, the fine can be $129,210 or 50% of the balance of the account at the time of the violation – whichever is greater. As you can see, penalties can add up quickly if you are years behind in your filing!
What Should I Do If I Haven’t Filed but Should Have?
First off, don’t panic! Millions of Americans are in your position, and the IRS has created two amnesty programs to help you get caught up. The program most helpful to expats is the Streamlined Filing Procedures. This program is available to US citizens living both in the US and abroad, and all who have failed to file due to a lack of knowledge of their obligations are eligible.
Previously, some restrictions prevented many expats from qualifying for the program, but the IRS lifted those to make it easier for people to get caught up. The most important change to the Streamlined Filing Procedures is that there are no late filing or FBAR penalties! That’s right–you can get caught up without harsh penalties! Note: if you live in the US, a 5% offshore penalty applies.
To file under this program, you will file the last three years of Federal Tax Returns if you haven’t already done so as well as the last six years of FBARs. FBAR reporting will be done electronically, just as it would if you filed on time, with special notation confirming your participation in the program.
Getting caught up is extremely important if you are behind in your filings. While there are no penalties when filing under the Streamlined Procedures, if the IRS finds out before you come forward, you will be ineligible for this program and subject to the maximum penalties. With the introduction of the FATCA legislation in 2010, the chances of getting caught have increased, as foreign financial institutions are now required to notify the IRS of your foreign accounts. Basically, the IRS will assume you were hiding the account(s), and you will be at their mercy. No one wants that!
Other Foreign Financial Reporting for Expats
Years ago, some expats got comfortable evading the FBAR because it was 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) changed all of that. 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:
- FATCA is filed with the IRS as part of your tax return
- FATCA reporting thresholds are higher
- Most importantly, FATCA requires foreign financial institutions to report directly to the IRS on financial accounts held by US taxpayers
This last point is critical. Because foreign financial institutions report directly to the IRS, the government can find out easily about your unreported foreign assets.
Need Help Filing Your FBAR?
Our expat-expert CPAs and IRS Enrolled Agents have helped hundreds of expats successfully file their FBAR–let us help you! Contact us today.