For FBAR compliance purposes, a “U.S. person” includes U.S. citizens, U.S. residents, and entities which include corporations, partnerships, limited liability companies, trusts, and estate formed under the laws of the United States. Such entities must file FBARs if they have financial interest in a bank, securities or other financial account located in a foreign country.
- 1 Financial Interest: Owner of record or holder of legal title
- 2 Indirect Financial Interest: Agencies and Trusts
- 3 Constructive financial interest: Corporations and partnerships
- 4 Anti-avoidance rule
- 5 Signature or other authority
- 6 Modified reporting requirements.
- 7 Filing exceptions for certain accounts
- 8 Filing exceptions for certain signature authority accounts
- 9 FBAR Penalties
- 10 Recordkeeping
- 11 What should non-compliant taxpayers do?
Financial Interest: Owner of record or holder of legal title
A domestic entity has a financial interest in a foreign financial account for which the entity is the owner of record or has legal title, regardless of whether that account is maintained for its benefit or the benefit of another.
Indirect Financial Interest: Agencies and Trusts
A United States person has a financial interest in each bank, securities or other financial account in a foreign country for which the owner of record or holder of legal title is:
- A person acting as an agent, nominee, attorney or in some other capacity on behalf of the United States person with respect to the account;
Example: John is a United States citizen. His brother Paul maintains bank accounts in Mexico on behalf of John. The accounts are held in Paul’s name, but Paul only accesses the accounts in accordance with his brother’s instructions. John has a financial interest in the Mexican bank accounts for FBAR reporting purposes. If his brother Paul is a United States citizen or resident, he also has an FBAR reporting requirement with respect to the accounts.
- A trust, if the U.S. person is the grantor and has an ownership interest in the trust for United States Federal tax purposes; or
Example: Diana, a United States citizen, is a grantor of a Foreign Asset Protection Trust but does not control trust assets nor does she receive distributions from the trust. Diana, as grantor and deemed owner of the trust assets for federal tax purposes, is required to report the trust’s foreign financial accounts.
- A trust in which the U.S. person either has a present beneficial interest in more than 50 percent of the assets or from which such person receives more than 50 percent of the current income.
Example: Amy, a United States citizen, has a remainder interest in a trust that has a foreign financial account. Amy is not required to report the trust’s foreign financial account because a remainder interest is not considered a present beneficial interest for FBAR purposes.
Constructive financial interest: Corporations and partnerships
In addition to having a financial interest where a U.S. person is named owner of record or holds legal title, a U.S. person is treated as having a financial interest through constructive ownership. A domestic entity has a financial interest in a foreign financial account by way of constructive ownership where the entity that is owner of record or holder of legal title is:
- A corporation in which the U.S. person owns directly or indirectly more than 50 percent of the voting power or the total value of the shares;
- A partnership in which the U.S. person directly or indirectly more than 50 percent of the interest in profits or capital, or any other entity in which the U.S. person owns directly or indirectly more than 50 percent of the voting power, total value of the equity interest or assets, or interest in profits;
Example. PARCO (a domestic corporation) owns 51% of the total value of the shares issued by SUBCO (a domestic corporation). PARCO must report on the FBAR any foreign financial accounts for which SUBCO is an owner of record or holder of legal title, or has other financial interest.
Example. The total value of FORCO’s (a foreign corporation) shares is owned by two U.S. shareholders. The U.S. shareholders must each report on an FBAR any foreign financial accounts for which FORCO is an owner of record or holder of legal title, or has other financial interest. FORCO itself does not have an FBAR filing requirement since it is not a U.S. entity.
A United States person that causes an entity, including but not limited to a corporation, partnership, or trust, to be created for a purpose of evading this section shall have a financial interest in any bank, securities, or other financial account in a foreign country for which the entity is the owner of record or holder of legal title.
For example, A creates and funds a trust, T, for the benefit of her children. B subsequently makes a gratuitous transfer to T. Both A and B are grantors of T and must report their grantor ownership interests.
A makes an investment in a fixed investment trust, T, that is classified as a trust. A is a grantor of T. B subsequently acquires A’s entire interest in T. B is a grantor of T with respect to such interest.
In addition to companies filing the entity’s FBARs, officers and employees of those companies who have signature or other authority over those accounts must also file FBARs. Signature authority is the authority of an individual (alone or in conjunction with another individual) to control the disposition of assets held in a foreign financial account by direct communication (whether in writing or otherwise) to the bank or other financial institution that maintains the financial account. The signature authority requirement only applies to individuals.
Example: Marco, a U.S. citizen, is employed by FORCO and has authority to deposit funds in and pay invoices from FORCO’s foreign financial account through direct communication with the bank. Even if Marco has no financial interest in the account, he must report his signature authority in the foreign financial account on the FBAR.
FinCEN recognizes that reporting of signature authority accounts can be duplicative, especially when the entity also must report its financial interest and where there are numerous officers and employees with signature authority over the same foreign financial accounts. Initially, FinCEN rejected proposals to remove the signature authority requirement, or to allow a consolidated report wherein all officers and employees with signature authority over the employer’s accounts can file one report. FinCEN argued that the duplicative reporting function was as an independent check on FBAR reporting to ensure that the employers themselves had reported the accounts.
However, in recent proposed changes to the FBAR, FinCEN has proposed to use the term “agent” to incorporate entities and individuals, such as authorized services providers and their employees, within the scope of the exemption. The exemption would eliminate the requirement for officers, employees, and agents of U.S. entities to report on accounts owned by the entity over which the officer, employee, or agent has signature authority solely due to their employment and those accounts are already required to be reported by their employer or any other U.S. entity within the same corporate or other business structure as their U.S. employer. The employer would be required to maintain the information identifying all officer, employees, or agents with signature authority but no financial interest in the company’s foreign financial accounts, and such records must be maintained for a period of 5 years.
The test for determining whether an individual has signature or other authority over an account is whether the foreign financial institution will act upon a direct communication from that individual regarding the disposition of assets in that account. The phrase ‘‘in conjunction with another’’ is intended to address situations in which a foreign financial institution requires a direct communication from more than one individual regarding the disposition of assets in the account.
Example: Megan, a United States resident, has a power of attorney on her elderly parents’ accounts in Canada, but she has never exercised the power of attorney. Megan is required to file an FBAR if the power of attorney gives her signature authority over the financial accounts. Whether or not the authority is ever exercised is irrelevant to the FBAR filing requirement.
Modified reporting requirements.
Financial interest in 25 or more foreign financial accounts. A United States person having a financial interest in 25 or more foreign financial accounts need only provide the number of financial accounts and certain other basic information on the report, but will be required to provide detailed information concerning each account when so requested by the Secretary or his delegate. Similarly, a United States person having signature authority in 25 or more foreign financial accounts need only provide the number of financial accounts and certain other basic information on the report and are subject to the same record-keeping requirement.
This “25 or more account” modification may soon no longer be available according to proposed FBAR amendments. Source.
Reporting for U.S. Persons Employed and Residing Outside of the United States. A U.S. person who is an officer or employee and is employed and residing outside of the U.S. and who has signature authority over a foreign financial account that is owned or operated by the person’s employer is only required to complete Part I and Part IV, Items 34-43 of the FBAR, as well as the signature section.
Example: Julia is a United States person who lives in Ireland and is employed by an Irish company. She is only required to complete Part I and Part IV, Items 34-43, and the signature section of the FBAR to report her signature authority over the foreign financial accounts of her employer.
Example: Given the above example, if Julia lived in the United States she would not be able to take advantage of the modified reporting requirement.
Consolidated Reports. An entity that is a United States person and which owns directly or indirectly more than a 50 percent interest in one or more other entities required to report under this section will be permitted to file a consolidated report on behalf of itself and such other entities.
In order for a subsidiary’s obligation to be satisfied through the parent’s FBAR filing, the subsidiary must be identified in Part V of the consolidated FBAR report as owner of the foreign financial account. In a consolidated report, all reportable accounts, both directly and indirectly owned by the filer should be reported in Part V. No accounts should be reported in part II when a consolidated report is filed.
The special rules for consolidated FBAR reporting only apply to U.S. persons. This can be of significance where a U.S. entity is directly or constructively owned by a foreign entity. The foreign entity has no FBAR filing requirement, and even a voluntarily filed consolidated FBAR on behalf of its U.S. subsidiary will not satisfy the U.S. entity’s filing obligation.
Participants in and Beneficiaries of Tax-Qualified Retirement Plans. Participants and beneficiaries in retirement plans under sections 401(a), 403(a) or 403(b) of the Internal Revenue Code as well as owners and beneficiaries of individual retirement accounts under section 408 of the Internal Revenue Code or Roth IRAs under section 408A of the Internal Revenue Code are not required to file an FBAR with respect to a foreign financial account held by or on behalf of the retirement plan or IRA.
Trust Beneficiaries. A trust beneficiary with a direct or indirect financial interest in more than 50 percent of the trust assets or income is not required to report the trust’s foreign financial accounts on an FBAR if the trust, trustee of the trust, or agent of the trust: (1) is a United States person; and (2) files an FBAR disclosing the trust’s foreign financial accounts.
Filing exceptions for certain accounts
U.S. federal and state government foreign financial accounts. An account of a department or agency of the United States, an Indian Tribe, or any State or any political subdivision of a State, or a wholly-owned entity, agency or instrumentality of any of the foregoing is not required to be reported. In addition, reporting is not required with respect to an account of an entity established under the laws of the United States, of an Indian Tribe, of any State, or of any political subdivision of any State, or under an intergovernmental compact between two or more States or Indian Tribes, that exercises governmental authority on behalf of the United States, an Indian Tribe, or any such State or political subdivision.
Example: A state administered college or university is not required to file an FBAR because it is a governmental entity.
Example: A government employee retirement or welfare benefit plan is not required to file an FBAR because it is a governmental entity.
International Financial Institution. An account of an international financial institution of which the United States government is a member is not required to be reported. Examples are the World Bank and the International Monetary Fund (IMF).
United States Military Banking Facility. An account in an institution known as a “United States military banking facility” (or “United States military finance facility”) operated by a United States financial institution designated by the United States Government to serve United States government installations abroad is not required to be reported even though the United States military banking facility is located in a foreign country.
Correspondent/Nostro Account. Correspondent or nostro accounts that are maintained by banks and used solely for bank-to-bank settlements are not required to be reported.
Individuals who have signature authority over, but no financial interest in, a foreign financial account are not required to report the account in the following situations:
- An officer or employee of a bank that is examined by Federal banking agencies is not required to report signature authority over a foreign financial account owned or maintained by the bank.
- An officer or employee of a financial institution that is registered with and examined by the Securities and Exchange Commission or Commodity Futures Trading Commission is not required to report signature authority over a foreign financial account owned or maintained by the financial institution.
- An officer or employee of an Authorized Service Provider is not required to report signature authority over a foreign financial account that is owned or maintained by an investment company that is registered with the Securities and Exchange Commission. Authorized Service Provider means an entity that is registered with and examined by the Securities and Exchange Commission and provides services to an investment company registered under the Investment Company Act of 1940.
- An officer or employee of an entity that has a class of equity securities listed (or American depository receipts listed) on any United States national securities exchange is not required to report signature authority over a foreign financial account of such entity. An officer or employee of a United States subsidiary is not required to report signature authority over a foreign financial account of the subsidiary if its United States parent has a class of equity securities listed on any United States national securities exchange and the subsidiary is included in a consolidated FBAR report of the United States parent.
- An officer or employee of an entity that has a class of equity securities registered (or American depository receipts in respect of equity securities registered) under section 12(g) of the Securities Exchange Act is not required to report signature authority over a foreign financial account of such entity.
FBAR Civil Penalties are discussed here. Criminal penalties can also be assessed, although extremely rare. In addition there is a negligence penalty under 31 U.S.C. 5321(a)(6) which only applies to non-individuals (i.e., trades or businesses). There are two negligence penalties that apply under 31 USC 5321(a)(6):
- A negligence penalty up to $500 may be assessed against a financial institution or non-financial trade or business for any negligent violation of the BSA, including FBAR violations.
- An additional penalty up to $50,000 may be assessed for a pattern of negligent violations.
Negligence is distinguished from non-willfulness and involves a lesser standard of proof. Specifically, actual knowledge of reporting requirements is not needed to establish a negligent failure to file FBARs. For example, if a financial institution or nonfinancial trade or business exercising ordinary business care and prudence for its particular industry should have known about the FBAR filing and record keeping requirements, failure to file or maintain records is negligent. Therefore, standards of practice for a particular industry are relevant in determining whether a negligent violation of 31 USC 5314 occurred. If the failure to file the FBAR or to keep records is due to reasonable cause, and not due to the negligence of the person who had the obligation to file or keep records, the negligence penalty should not be asserted.
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. 31 USC 5321(a)(6)(B). The examiner is given discretion to determine the penalty amount up to the $50,000 ceiling. There are no mitigation guidelines for this penalty. The pattern of negligence penalty should be asserted only in egregious cases.
Related: Examination of FBAR violations.
Records of accounts reportable on the FBAR should be kept for five years from the FBAR filing deadline. Retaining a copy of the filed FBAR can help to satisfy the record keeping requirements. An officer or employee who files an FBAR to report signature authority over an employer’s foreign financial account is not required to personally retain records regarding these accounts.
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:
- Voluntary disclosure program
- Streamlined domestic offshore program
- Streamlined foreign offshore program
- Delinquent international information return submission procedures
- Delinquent FBAR Submission Procedures
We assist taxpayers who have undisclosed foreign financial assets. Schedule an appointment to see how we can help.