Many US taxpayers have foreign bank and financial accounts that they are required to report. However, many of these foreign account owners do not report this, which is why FBAR, also known as FinCEN Form 114, was created.
FBAR helps the United States identify unreported income and offshore accounts. “Every American citizen has an obligation to the state. Failure to meet these obligations has repercussions,” says attorney John Pontius Pontius tax law.
The purpose of FBAR is to notify the Internal Revenue Service (IRS) of any accounts or other assets that taxpayers have outside of the United States. The IRS here helps enforce FBAR compliance and assess and enforce foreign account penalties against taxpayers who fail to comply with FBAR rules.
Essential Facts About FBAR Filing for 2022
While filing US tax returns is a well-known need of Americans living abroad, many overlook the Foreign Bank Account Report (FBAR). Failure to file the FBAR can attract IRS investigation and severe penalties. Here are key points to note on the FBAR filing to ensure you stay compliant and off the IRS hit list:
#1. FBAR Filing Deadline
The annual filing deadline for the FBAR is April 15. If you cannot file the form by the FBAR filing date, an automatic FBAR extension until October 15 will be granted. If you need to file the form after October 15, you must meet special requirements to extend the deadline.
#2. Which accounts should appear on the FBAR?
Bank accounts and financial accounts such as securities accounts (brokerage accounts and securities derivatives), foreign pension/retirement accounts, and investment accounts should all be listed on the FBAR. In addition, cash value insurance policies (including whole life insurance), mutual funds or similar pooled assets, and any other account held by a foreign financial institution must also be listed on the FBAR.
Some accounts, however, are not required to file an FBAR. Accounts maintained by the United States military financial institution, held by an international financial institution or government agency, and held in an Individual Retirement Account in your name are exempt. Also exempt are Correspondent or Nostro accounts, accounts held in a pension plan in your name, and accounts held in a trust of which you are a beneficiary.
#3. Who is required to file an FBAR?
It is important to note who must file an FBAR. The people who are required to file an FBAR are:
- An individual from the United States: According to FBAR rules, any person or entity that meets the definition of a United States person is required to file an FBAR. Citizens, residents, corporations, partnerships, LLCs, trusts, and estates are all considered United States persons for FBAR reporting purposes. Additionally, if a non-US citizen passes the green card or significant presence tests (two criteria used to assess a taxpayer’s residency status), they are considered a resident.
Therefore, if you have a financial interest or authoritative signature in one or more financial accounts located outside of the United States, you are obligated to file an FBAR. Even if the account does not generate any taxable income during the year, it must be included in the report.
Another requirement for completing an FBAR is that the total value of all your offshore financial accounts exceed $10,000 at any time during the calendar year. Total value refers to the aggregate value of all accounts. In other words, even if no account in the year reaches $10,000 and the aggregate amount of all your accounts exceeds $10,000 at any time, you must still complete this form.
- If you have signing rights on an account: the FBAR form is not restricted to account holders who control the account. It also applies to filers with signing authority, which means the taxpayer does not have to own the funds in the offshore accounts to be required to file the FBAR form. Even if their designation is a signer on the offshore account, the taxpayer must file the FBAR.
- Minors are also authorized to deposit: minors are not exempt from completing the FBAR form. Therefore, if your young child has enough foreign account balances to meet the FBAR filing threshold, they must still submit the FBAR.
#4. What happens if you miss the FBAR deadline?
The repercussions of not meeting FBAR deadlines are serious. Failure to file the FBAR can result in heavy penalties and fines which can be costly.
Even if the failure was due to an honest misunderstanding of the laws, civil fines for unintentional FBAR violations could be as high as $13,481 per violation. The penalty for intentional FBAR violation can be up to $134,806 or 50% of the account total per violation. In addition to civil penalties, criminal penalties can include fines of up to $500,000 and up to ten years in prison.
How to file the FBAR
Unlike your federal tax return, FBAR returns are submitted to the United States Department of Treasury, specifically FinCen, rather than the Internal Revenue Service. The FBAR is not sent by mail. Instead, it is done electronically through the Financial Crimes Enforcement Network’s BSA electronic filing system.
It is possible that someone else will file the FBAR on your behalf. However, you must file FinCEN Report 114a, Record of Authorization to File FBARs Electronically. This form is not part of your FBAR submission. Instead, make a copy and keep it to give to the IRS if needed.
How to achieve FBAR compliance
While many taxpayers voluntarily comply with their obligations, some do not. There is a wide range of civil and criminal penalties against offending taxpayers; failure to voluntarily cooperate may result in imprisonment, fines and other penalties.
If you have deliberately failed to comply with tax or tax-related obligations, making a voluntary disclosure could be a way to remedy your non-compliance and avoid criminal prosecution. Voluntary disclosure is not the only option for taxpayers who have not yet filed their FBAR on time. Streamlined filing procedures, DIIRSP, DFSP and other IRS programs are also available.
If you are not compliant, you should speak with an experienced attorney before making affirmative returns to the IRS.
final thought
It is your responsibility as a US citizen to file the FBAR. The only safe approach to avoiding IRS penalties and fines is to ensure compliance with FBAR standards. Also, before making positive disclosures to the IRS, you should consult an experienced attorney if you are not in compliance.
Produced in collaboration with Craig Lebrau
Comments are closed.