Updated: Feb 22, 2019
In addition to the FATCA forms (8938, 5471, 8865, etc.), US persons with offshore accounts will also need to file a Report of Foreign Bank and Financial Accounts (FBAR). Although people often mention FBAR filings with FATCA filings, they are not the same. FATCA forms are filed with your tax return to the IRS, while the FBAR(s) are due Oct 15th to the Financial Crimes Enforcement Network (FinCEN).
So what is the FBAR?
Unlike your tax returns, where you must determine the amount of tax you owe the government, the FBAR is purely an informational form. In other words, rather than paying the government, the Treasury department seeks information on how much financial assets you have offshore.
As part of the Bank Secrecy Act, the Treasury department requires certain taxpayers or US persons to file an FBAR. This is in addition your federal income tax filing. In other word, this form is required if:
You are a United States person with a financial interest in or signature authority over at least one financial account located outside of the United States; and the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year.
Sounds simple, but we are dealing with the same people who wrote the Internal Revenue Code, so of course the definitions will be as complicated as possible.
The term United States person is quite broad and includes: U.S. citizens (including those with dual citizenships); U.S. residents (meeting the IRC tests); entities (including but not limited to, corporations, partnerships, or limited liability companies, created or organized in the United States or under the laws of the United States); and trusts or estates formed under the laws of the United States.
Financial interest in or signature authority corresponds with ownership or control of the account. Even if you are not the owner of a foreign financial account, you may still find yourself in hot water if you have signatory authority over the account. This often happens where a person has power of attorney, or serves as an agent, nominee, attorney, or a person acting on behalf of the United States person.
A financial account includes, but is not limited to, a security, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution (or other person performing the services of a financial institution). A financial account also includes a commodity futures or options account, an insurance policy with a cash value (such as a whole life insurance policy), an annuity policy with a cash surrender value, and shares in a mutual fund or similar pooled fund (i.e., a fund that is available to the general public with a regular net asset value determination and regular redemptions). In summary, check with a qualify advisor.
There are filing exceptions for the following United States persons or foreign financial accounts. This list is not exclusive, but what it is what I most commonly see. For a better listing, check out the FBAR Reference Guide.
Certain foreign financial accounts jointly owned by spouses. In this case, spouses can file one joint FBAR.
United States persons included in a consolidated FBAR.
Owners and beneficiaries of U.S. IRAs.
Participants in and beneficiaries of tax-qualified retirement plans.
Foreign financial accounts maintained on a United States military banking facility.
Like most international issue, there are many misconceptions. The most common one is that many taxpayers believe that if the foreign account is not generating income, there is no reporting. Recall, income generation is not one of the requirement for filing an FBAR. The only requirement is that you own or have signatory authority in a foreign account.
The second misconception is that if filing an FBAR was so important, why didn't the tax preparer inform the taxpayer? The truth is that most tax preparers simply lack knowledge. In fact, the reporting obligation is triggered by answering one question on Schedule B. Most tax preparers get overwhelmed and simply skipped this question. Unless a tax preparer reads carefully, this may escape their purview.
The third misconception is that how would the U.S. government know the account exists? In 2010, the U.S. enacted the Foreign Account Tax Compliance Act or (FATCA). Essentially, what FATCA did was create a mandatory information sharing platform, where foreign financial institutions must search for U.S. customers and report their assets and identities to the U.S. Department of Treasury. Thus, it is no longer a question of "if" the U.S. finds a taxpayer's offshore accounts, but a question of "when" the U.S. finds these offshore accounts.
What happen if you don't file an FBAR?
Those required to file an FBAR who failed to properly file a complete and correct FBAR may be subject to civil monetary penalties.
For penalties that are assessed after August 1, 2016, whose associated violations occurred after November 2, 2015, the IRS may assess an inflation-adjusted civil penalty not to exceed $12,459 per violation for non-willful violations that are not due to reasonable cause. The key words here are "per" and "violation." In other words, if you own 3 bank accounts that you have failed to report for the last 3 years, this number is $12,459 x 9, or $112,131.
For willful violations, the inflation-adjusted penalty may be the greater of $124,588 or 50 percent of the balance in the account at the time of the violation, for each violation.
Unfortunately, "willfulness" is a very loosely defined term. Taxpayers who do not think they are willful in a regular sense may face criminal prosecution.
For taxpayers who are not citizens, such as green card holders, the possibility of criminal prosecution could even mean deportation.
These materials have been prepared by Le Tax Law, PLLC for informational purposes only. They are not intended to be and should not be considered legal advice.
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