Foreign Nationals & Expats
Houston Tax Attorney
- 1 Foreign Bank and Account Reporting on the FBAR
- 2 What is the FBAR Filing Deadline?
- 3 Consequences of FBAR Non-Compliance
Foreign Bank and Account Reporting on the FBAR
If you are a US citizen or tax resident, you may have a foreign bank account reporting obligation. Form finCEN 114, Report of Foreign Bank and Financial Accounts (also commonly known as the Foreign Bank Account Report, or “FBAR”) is required to be filed annually by “each United States person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country.”
In order for an individual to have an FBAR filing requirement, he or she must meet all of the following.
Are they a United States Person?
A United States person is any person that is a United States citizen or tax resident, and includes, individuals, corporations, partnerships, trusts or estates, joint stock companies, associations, syndicates, joint ventures, other unincorporated organizations or groups, Indian Tribes, and all entities recognized as legal personalities (including single-member LLCs that are otherwise disregarded for tax purposes).
Is There a Financial Interest, Signature or Other Authority?
There are two requirements for an account to be considered a reportable account on the FBAR.
(1) There must be a financial interest, signature authority, or other authority over the financial account.
A U.S. person has a financial interest in each account for which such person is the owner of record or has legal title, whether the account is maintained for his own benefit or for the benefit of others including non-U.S. persons. Sometimes an individual may not be the legal account holder but may have an indirect financial interest in the account. Example: Bob sends $25,000 to his brother John in Canada to open up an investment account and deposit the money for him. John opens the account in his name, but the money clearly belongs to Bob. Bob has an indirect financial interest in that account and must report it on the FBAR. Any income earned from that account must also be reported on Bob’s U.S. income tax return.
A common scenario we’ve come across is where an overseas parent opens an account in a foreign country and includes their U.S. resident son or daughter as a legal account holder. This is common practice in some Asian countries as a will substitute. Such countries might not have a reliable probate system and the only way to ensure a seamless transfer of inheritance upon death is to include the future beneficiary on the account. This creates an FBAR filing requirement for their U.S. resident son or daughter. However, any income from these accounts may not need to be reported on the child’s tax returns. Unlike for FBAR reporting, for tax purposes there is a distinction made between equitable and legal ownership.
A person is considered to have signature authority over an account if the person can control the disposition of assets in the account by direct communication with the institution with whom the account is maintained.
(2) The foreign account must be a bank, securities, or other financial account. Below is a table of the types of financial accounts that are required to be reported on the FBAR.
|Financial (deposit and custodial) accounts held at foreign financial institutions||Yes|
|Financial account held at a foreign branch of a U.S. financial institution||Yes|
|Financial account held at a U.S. branch of a foreign financial institution||No|
|Foreign financial account for which you have signature authority||Yes, subject to exceptions|
|Foreign stock or securities held in a financial account at a foreign financial institution||The account itself is subject to reporting, but the contents of the account do not have to be separately reported|
|Foreign stock or securities not held in a financial account||No|
|Foreign partnership interests||No|
|Indirect interests in foreign financial assets through an entity||Yes, if sufficient ownership or beneficial interest (i.e., a greater than 50 percent interest) in the entity. See instructions for further detail.|
|Foreign mutual funds||Yes|
|Domestic mutual fund investing in foreign stocks and securities||No|
|Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust for which you are the grantor||Yes, as to foreign accounts|
|Foreign-issued life insurance or annuity contract with a cash-value||Yes|
|Foreign hedge funds and foreign private equity funds||No|
|Foreign real estate held directly||No|
|Foreign real estate held through a foreign entity||No|
|Foreign currency held directly||No|
|Precious Metals held directly||No|
|Personal property, held directly, such as art, antiques, jewelry, cars and other collectibles||No|
|‘Social Security’- type program benefits provided by a foreign government||No|
Are the Accounts Above the Threshold for Filing an FBAR?
If the aggregate value (total value) of all reportable accounts exceeds $10,000 at any point in the calendar year exceeds $10,000, all such accounts must be reported.
Example: Bob has 5 foreign bank accounts. The highest total value of all accounts was on July 1, 2016. On this date Bank A had $1,000, Bank B had $3,000, Bank C had $0, Bank D had $5,000, and Bank E had $2,000, resulting in a total value of $11,000. Therefore, Bob has an FBAR filing requirement with respect to all 5 of his foreign bank accounts.
What Types of Financial Accounts are Required to be Reported?
Any financial account maintained in a geographic location outside of the U.S. is covered by the FBAR. A financial account includes the following:
Bank Account—a savings deposit, demand deposit, checking, or any other account maintained with a person engaged in the business of banking;
Securities Account—any account maintained with a person engaged in the business of buying, selling, holding, or trading stock or other securities;
Life insurance – An insurance or annuity policy with a cash value;
Brokerage – An account with a person that acts as a broker or dealer for futures or options transactions in any commodity or is subject to the rules of a commodity exchange or association; or
Mutual Funds – An account with a mutual fund, or similar pooled fund, which issues shares available to the general public that have a regular net asset value determination and regular redemptions. This definition excludes other joint investment arrangements such as private equity funds and hedge funds that do not meet these criteria.
Bonds and Stocks – Bonds and stock certificates individually held by a taxpayer are not financial accounts and do not need to be reported on the FBAR.
Safe-deposit Boxes – Safe-deposit boxes are generally not within the scope of the FBAR reporting requirements.
Debit cards and Pre-paid cards – Such accounts may be considered financial accounts and may be reportable on the FBAR.
Cryptocurrency – Bitcoin is considered by the IRS to be a “capital asset” like gold or silver. It does not need to be reported if it is directly held, but if it’s held through a platform like Coinbase or Bitstamp, it may be subject to FBAR reporting if the currency is stored on a computer or server located outside the U.S.
Other – Any account with a person that is in the business of accepting deposits as a financial agency; “Capital assets” such as foreign real estate and precious metals like gold and silver are not reportable on the FBAR if they are directly held. If your gold is located in a safe deposit box at a bank, then it’s reportable on the FBAR. But if your gold is located in a private, non-bank storage, such as a vault, then it might not be reportable on the FBAR as long as you own specific pieces of precious metals that are uniquely identified as belonging to you (e.g., serial numbers).
What is the FBAR Filing Deadline?
The deadline used to be June 30, however, beginning with the 2016 FBARs, the due date has been rolled back to April 15 coincide with the tax return due date. Additionally, the deadline can now be extended. If you file an extension for your tax return, your FBAR deadline will be automatically extended to October 15.
Consequences of FBAR Non-Compliance
The U.S. has intergovernmental agreements (IGAs) with an ever growing number of foreign jurisdictions under the FATCA regime. IGAs require foreign taxing authorities to provide information about individuals that are believed to be U.S. persons and have financial accounts in their jurisdiction. Even in the absence of an IGA, foreign banks often voluntarily choose to report this information since banks that do not comply with FATCA forfeit their ability to do business with the U.S.
Foreign banks that are FATCA compliant will send a letter to any clients they believe have a U.S. nexus. Often known as a “FATCA letter”, this is the first step in the process of information sharing with the IRS. If the account holder chooses not to respond or the bank determines that the account holder is not compliant, this information will be eventually provided to the foreign taxing authority which will in turn be disclosed to the IRS. Once the IRS determines there has been an FBAR violation, the IRS examiner will issue either a FBAR warning letter (Letter 3800) or decide to assess a penalty. Read about how the IRS examines FBAR violations. Whether the IRS examiner will issue a warning letter or assess a penalty will depend on the facts. Here’s an example provided in the IRM: “An individual failed to report the existence of five small foreign accounts with a combined balance of $20,000 for all five accounts, but properly reported the income from each account and made no attempt to conceal the existence of the accounts. The examiner must consider all the facts and circumstances of this case to determine if a warning letter is appropriate in this case or if it would be appropriate to determine civil FBAR penalties.”
FBAR Penalty Structure
The IRS imposes various levels of FBAR civil penalties and rarely criminal penalties for failure to file an FBAR, depending on the severity of the non-compliance.
Under 31 USC 5321(a)(6)(A), a negligence penalty up to $500 may be assessed against a business for any negligent violation of the BSA, including FBAR violations. The simple negligence penalty applies only to businesses, not individuals. If any trade or business engages in a pattern of negligent violations of any provision (including the FBAR requirements)] of the BSA, a civil penalty of not more than $50,000 may be imposed. This is in addition to the simple negligence $500 penalty. The examiner is given discretion to determine the penalty amount up to the $50,000 ceiling.
Nonwillful FBAR Violations
Under 31 USC 5321(a)(5)(B), a penalty, not to exceed $10,000 per violation, may be imposed on any person who violates or causes any violation of the FBAR filing and recordkeeping requirements. The penalty should not be imposed if the violation was due to reasonable cause, and the person files any delinquent FBARs and properly reports the previously unreported account.
Willful FBAR Violations
Under 31 USC 5321(a)(5)(C), a penalty for a willful FBAR violation may be imposed on any person who willfully violates or causes any violation of the FBAR filing and recordkeeping requirements. The statutory ceiling is the greater of $100,000 or 50% of the balance in the account at the time of the violation. There may be both a reporting and a recordkeeping violation regarding each account. Examiners may recommend a penalty that is higher or lower than 50 percent of the highest aggregate account balance of all unreported foreign financial accounts based on the facts and circumstances. In no event will the total penalty amount exceed 100 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination.
What should non-compliant taxpayers do?
If taxpayers are non-compliant with the foreign asset and income reporting requirements, they should consider applying to one of IRS’ voluntary disclosure programs:
- Offshore voluntary disclosure program
- Streamlined domestic offshore program
- Streamlined foreign offshore program
- Delinquent international information return submission procedures
We assist taxpayers who have undisclosed foreign financial assets. Schedule an appointment to see how we can help.