What is the FBAR?
Although many expats fail to acknowledge their obligation to file US taxes while living overseas, there are other filing obligations that expats must be aware of to avoid high penalties and stay 100% compliant with the US government.
While the IRS wants tax returns, the US Department of the Treasury has reporting requirements of its own. One of these reports (and the one most commonly required by those with assets abroad) is the FBAR. The FBAR, or Foreign Bank Account Report, is required for expats with bank accounts overseas with balances that are higher than a specific threshold. In this article, we explain who needs to file the FBAR, what types of accounts must be reported, how to go about submitting the report to the US Department of Treasury and the penalties delinquent filers can expect.
Who must file?
Any individual who has foreign bank accounts overseas may need to file. Currently the threshold is set at $10,000. What confuses some expats is how to determine whether their bank accounts have surpassed this $10,000 threshold.
If you have over $10,000 (or its monetary equivalent) in a single foreign bank account, it must be reported with FinCEN Form 114 (electronically). However, if you have multiple bank accounts with balances under $10,000, you still may be required to file.
Let’s say, for example, you have resided in Italy for multiple years and have three bank accounts in Milan. One is your checking account, which has a balance of the Euro equivalent of $3,000. One is your savings account, which has a balance of the Euro equivalent of $7,000. Lastly, you have an investment account that you deposit into monthly, with a current balance of $5,000. When you total these three accounts together, the total is $15,000. For that reason, all three accounts (as well as any other foreign accounts) must be reported on the FBAR.
What types of accounts must be reported?
Many expats ask questions about which accounts must be reported. An easy way of identifying whether an account must be reported is clarifying whether or not you have signature authority over that account.
If you have a small business account set up for a bakery you run in Milan, this account must be reported. If you are married to a non-resident and have a joint savings account, this account must be reported. If you have an offshore investment account in a no-tax zone, this account must be reported.
Essentially, any account with your name on it — even if it is shared with multiple other individuals with signature authority — must be reported on your FBAR.
How do I file the FBAR?
Any accounts that need to be reported must be included when you file the FBAR. FinCEN Form 114 is not submitted with your Federal Tax Return to the IRS. Instead, it is submitted to the US Department of the Treasury.
FinCEN 114 is a relatively simple form to complete. In order to complete the form, you must have information regarding the bank, such as the bank name, address and contact information. Next, you must have the account number and the highest balance you had in the account over the given tax year. It is important to ensure you include every bank account you have overseas when you complete this form to avoid penalties for incorrect filing.
This form is to be completed online and filed electronically to the US Department of the Treasury by the 30th of June of every year. No extensions.
To help taxpayers meet this deadline, the Treasury does have a system set up for e-filing. The FinCEN’s e-file system is simple to use and eliminates the stress of ensuring the Treasury receives your reports by the deadline. This is especially helpful for those who may need to send their FBAR from overseas.
Penalties for failing to file the FBAR
If you did not know that you needed to report your overseas bank accounts to the US Department of the Treasury or failed to report them for other reasons, you are potentially going to face penalties. These penalties vary depending on your reason for being delinquent and the value of your overseas account. The worst case scenario is seizure of 50% of the highest balance of your foreign accounts, a $50,000 fine per violation, or a combination of the two. The Treasury also reserves the right to pursue criminal prosecution, which can and will include jail time. Generally speaking, you are going to face higher penalties if the Treasury finds your accounts than you would if you came forward with your delinquent FBARs.
At the time of writing (February 2012), the Offshore Voluntary Disclosure Program is open without a closing date. This program allows delinquent filers to come forward, face reduced or eliminated penalties and avoid any criminal prosecution.
Questions About Your FBAR?
If you have any questions about your foreign bank account reporting requirements, you might want to have a look at this video post about voluntary disclosure. For more information, or to learn about our expat tax services, please contact us.