If you are a U.S. citizen with financial interest in or signature authority over a foreign account, you will likely need to file a Report of Foreign Bank and Financial Accounts, commonly known as FBAR. An FBAR report is used to notify the IRS of interest in financial accounts outside of the United States, including banking accounts, mutual funds, trusts and other accounts. It is filed electronically with the Financial Crimes Enforcement Network (FinCen).
U.S. persons are required to file an FBAR if the aggregate balance of all foreign financial accounts exceeds $10,000 at any time during the year. While an FBAR is an information report, not a tax return, it was created by the IRS to uncover tax evasion schemes and deter fraudulent reporting. If you meet the requirements to file an FBAR, you must include information on all your accounts, even those with a zero or negative balance.
Who files an FBAR?
According to the U.S. Department of Treasury guidelines, FBAR reports are required for U.S. persons who meet the $10,000 threshold. U.S. persons are defined as American citizens, residents and entities, including corporations, partnerships and limited liability companies, as well as trusts and estates formed under U.S. law. This may include minors, who can receive assistance filing their FBAR from parents or guardians.
"FBAR is an information report, not a tax return."
Even if you are not the account holder, you may be required to file an FBAR if you have signature authority over a foreign account that exceeds the threshold. Signature authority is defined as the ability to disburse money or other property from the account through the use of your signature. You must also file an FBAR if you have financial interest in the account, meaning you are the owner of record or have legal title, even if the account is maintained by others for your benefit or maintained by you for the benefit of others, including non-U.S. citizens.
There are several other conditions in which FinCen would consider you to have financial interest in the foreign accounts, including if you are acting on behalf of the account's owner of record, as in the case of an agent, nominee or attorney. Additionally, if you own more than 50 percent of the total stock or voting power of the stock in a corporation, you would be required to report the corporation's foreign accounts exceeding the threshold. This also applies to partnerships, foreign and domestic, and any trusts in which you have 50 percent of greater beneficial interest, or receive 50 percent or more of the trust's income.
Who is exempted from the FBAR?
Under limited instances, a U.S. person or a foreign account may be exempted from FBAR reporting. This includes accounts established by banks exclusively for bank-to-bank settlements and foreign financial accounts owned by a U.S. governmental entity or international financial institutions, or maintained by a U.S. military installation.
Any information on your FBAR will not have to be duplicated by your spouse on a separate FBAR as long as the accounts are jointly owned. Participants and beneficiaries in tax-qualified retirement plans are also not required to report foreign accounts owned by the retirement plan. Also, if you have signature authority but no financial interest over the account because you are an officer or employee of the entity that owns and maintains the account, you may be exempted in certain situations. These include employees of financial institutions registered with the SEC or Commodity Futures Trading Commission.
If you met the qualifications to file an FBAR any point during the 2015 calendar year, you must file the report by June 30, 2016. For the 2015 report year, there are no extensions for FBAR reports. The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, P.L. 114-41, changed the FBAR due date from June 30 to April 15 beginning with the 2016 report year (for reports filed in 2017 and future years). Additionally, the new law allows for a six-month extension for filing FBARs.
What happens if you don't comply with the FBAR?
Failure to file a required FBAR will generally result in severe financial penalties. The amount tied to these penalties depends on whether you failed to file an FBAR due to negligence or a deliberate attempt to evade the reporting. For a nonwillful violation – meaning you were not aware of your obligation to report an FBAR – you may face a penalty of up to $10,000 for each year the FBAR was not filed.
If FinCen determines your violation was willful, you may be required to pay a penalty greater than 50 percent of the total balances in your foreign bank accounts at the time of the violation or $100,000, whichever is greater. This fee will apply to each year you failed to file. Willful violations may also be considered criminal acts and may come with additional charges.
If you are unsure whether you must file an FBAR, contact the tax services professionals at LaPorte. LaPorte's experienced tax professionals have the knowledge to guide you through the compliance process.