Here some common mistakes we have come across by FBAR filers.
Contents
#1 Not reporting non-bank financial accounts
It would be logical to believe that the FBAR, known colloquially as the “Foreign Bank Account Report”, requires a person to report only foreign bank accounts. However, the FBAR (form FinCEN 114) is an acronym for the “Report of Foreign Bank and Financial Accounts“.
What is a financial account?
A financial account includes (but is not limited to) the following:
Bank Account
Retirement and pension accounts
Securities account
Commodity futures or options accounts
Life insurance or annuity policy with a cash value
Mutual Funds
Debit cards and pre-paid cards
Cryptocurrency held through a foreign exchange or stored on a computer or server located outside the U.S.
Any other accounts maintained in a foreign financial institution or with a
person performing the services of a financial institution.
#2 Filing jointly when both spouses have separate accounts
Married couples may file jointly only if all the financial accounts the non-filing spouse must report are jointly owned with the filing spouse.
Examples:
Joe and Jane have joint foreign accounts and no separate accounts. Either Joe or Jane may file a joint FBAR and include the non-filing spouse on Part III of the FBAR.
Joe and Jane have joint foreign accounts. Joe has separate accounts also and Janna does not have any separate accounts. Joe may file a joint FBAR and include Jane on Part III of the FBAR.
Joe and Jane have joint foreign accounts. Joe and Jane also each have separate accounts. They are not eligible to file a joint FBAR and must file separate FBARs. The joint accounts are included on both of their FBARs.
#3 Not filing until becoming U.S. permanent residents
Many filers conflate residency for immigration purposes with tax purposes. While an individual present in the U.S. on a temporary visa is not a permanent resident for immigration purposes, for tax purposes they will be considered a U.S. person when they meet the substantial presence test.
#4 Not reporting all accounts once the threshold is met
A U.S. person must file an FBAR if they have financial interest in or signature or other authority over any financial account(s) outside the U.S. and the aggregate amount(s) in the account(s) exceeds $10,000 at any time during the calendar year.
Once this threshold is met, all foreign financial accounts must be reported, including accounts with less than $10,000. There is no “de minimis” amount exception; even an account with a balance of $0 should be reported if the aggregate threshold is met.
#5 “It’s not my money”
It some countries it is common for elderly parents to have their children as joint owners on their financial accounts, particularly where probate laws are not well-developed or have lengthy probates.
It can seem logical for the U.S. person to believe that they have no reporting requirement because their parent(s) are the source of the funds and the U.S. person has no transactions with the account. A lack of beneficial interest could be an argument against the inclusion of such assets on the tax return.
However, there is no such exception for FBAR filing, which requires reporting of all foreign financial accounts in which a U.S. person has financial interest or signature authority.
A U.S. person has financial interest over a foreign financial account if the U.S. person is the owner of record or holder of legal title, regardless of whether the account is maintained for benefit of the U.S. person or for the benefit of another person, including non-U.S. persons.
What should non-compliant taxpayers do?
If a person is non-compliant with their foreign asset and income reporting requirements, they should consider resolving it through one of the IRS’s voluntary disclosure programs: