Find out if below if you are required to file an FBAR and how a lawyer can help.
What is an FBAR lawyer?
There’s a good chance that you probably found our page because you searched for an FBAR lawyer or an FBAR attorney. There’s really no such thing as an FBAR lawyer. You do not need a lawyer to file an FBAR if you’re compliant.
However, if you’ve never filed an FBAR or haven’t in many years, or have unreported foreign income and failure to disclose foreign financial assets on Form 8938, you do need a tax lawyer in that case. You especially need a tax lawyer who specializes in disclosing of foreign accounts.
Who is required to report foreign financial accounts 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.
(1) Are you 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).
(2) 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. 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 if there is no current beneficial 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|
(3) 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 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 to 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.
How will the IRS find out?
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.
Other Foreign Account Reporting Requirements
In addition to the FBAR, individuals with foreign assets or interests may have one or more of the following reporting requirements:
- Form 8938 (FATCA):
- US Citizens, resident aliens, and aliens who meet the substantial presence test must report specified foreign assets on Form 8938 with their Form 1040.
- There is a filing threshhold which varies from $50,000 to $600,000 depending on the filing status of the taxpayer and whether the taxpayer is living in the US or outside the US.
- Form 3520:
- If you are a US Person who receives foreign gifts of money or other property over $100,000 (or $15,601 if received from a foreign corporation or partnership) must report the gift on Form 3520.
- Form 5471 & 5472:
- If you are a US citizen or permanent resident living abroad or a citizen or resident living in the US, you must report your interest in any foreign corporations if you have a specified relationship with the corporation and own or have control over a specified percentage of the total value of the corporation.
- Form 926:
- U.S. persons, domestic corporations or domestic estates or trusts must file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, to report any exchanges or transfers of property (as described in section 6038B(a)(1)(A) of the Internal Revenue Code) to a foreign corporation.
- Form 8865:
- This form is filed with your US tax return if you own 10% or more of a foreign partnership or foreign flow through LLC. This form shows the income and expense statement of the foreign partnership and the yearly balance sheet. It also reports details of the partnership and your allocable share of the partnerships income. It is similar to Form 1065 which is filed for a US based partnership or LLC.
Penalties for Non-Compliance
Taxpayers who are not compliant with the above compliance requirements can be subject to the following penalties.
- Form 8938 (FATCA):
- If you are required to file Form 8938 but do not file a complete and correct Form 8938 by the due date (including extensions), you may be subject to a penalty of $10,000. See Treas. Reg. 1.6038A-4(a)(1).
- If you do not file a correct and complete Form 8938 within 90 days after the IRS mails you a notice of the failure to file, you may be subject to an additional penalty of $10,000 for each 30-day period (or part of a period) during which you continue to fail to file Form 8938 after the 90-day period has expired. The maximum additional penalty for a continuing failure to file Form 8938 is $50,000. See Treas. Reg. 1.6038A-4(d)
- If you underpay your tax as a result of a transaction involving an undisclosed specified foreign financial asset, you may have to pay a penalty equal to 40 percent of that underpayment.
- If you underpay your tax due to fraud, you must pay a penalty of 75 percent of the underpayment due to fraud.
- In addition to the penalties already discussed, if you fail to file Form 8938, fail to report an asset, or have an underpayment of tax, you may be subject to criminal penalties.
- Form 3520:
- The penalty for failure to report a large gift (or bequest) from a foreign person on a timely, complete, and accurate Form 3520 is 5 percent of the amount of such foreign gift (or bequest) for each month for which the failure continues after the due date of the reporting U.S. person’s income tax return (not to exceed 25% of such amount in the aggregate). IRM 220.127.116.11.4
- Form 5471 & 5472:
- The noncompliance penalty adjustment permits the Service, in its sole discretion, to deny deductions and adjust cost of goods sold with respect to the related party transaction(s) based upon information available to the Service. IRC 6038(d)(3).
- Form 926:
- Anyone who fails to any exchanges or transfers of specified foreign properties must pay a penalty equal to 10 percent of the fair market value of the property at the time of the exchange. IRC § 6038B
- Form 8865:
- The initial penalty is $10,000 per failure.
- If any failure continues more than 90 days after the day on which the notice of such failure was mailed to the taxpayer (90-day period), additional penalties of $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of the 90-day period will apply. The maximum continuation penalty is limited to $50,000 per failure.
- The maximum total penalty under IRC 6679 is $60,000 per failure (an initial penalty maximum of $10,000 plus the continuation penalty maximum of $50,000 per failure).
In addition to the above foreign asset reporting penalties, if a US citizen or permanent resident living abroad fails to file a US tax return, the various return penalties (failure to pay, failure to file, and interest) are applied in combination with the above penalties.
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: