Foreign Bank Disclosures

Understanding FBAR – The Ultimate Guide to Foreign Bank and Financial Account Reporting for U.S. Tax Payers

You must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) if your foreign financial accounts’ total worth exceeds $10,000 at any point during the year. Failing to file this report can result in severe non-compliance penalties and an IRS audit. As a result, if you meet the $10,000 threshold, filing FBAR is crucial. 

However, if this is your first time filing an FBAR, you may have many questions: What is FBAR, and do I need to file it? What is the deadline for filing an FBAR? How does filing an FBAR work? What happens if I were supposed to file an FBAR but did not know about this reporting requirement?

In this post, we at The W Tax Group take an in-depth look at all aspects relating to FBAR to address your key concerns and queries. To get help now, contact us today.

What Is the FBAR? Overview

FBAR is an acronym referring to FinCEN Form 114 (Report of Foreign Bank and Financial Accounts). If the value of your foreign bank accounts exceeds a certain amount, you must file this form to report foreign bank accounts to the United States Government. 

While the Internal Revenue Service (IRS) administers foreign bank and financial account reporting, you must file an FBAR with the Financial Crime Enforcement Network (FinCEN), a U.S. Department of Treasury division.

FBAR – A Legislative Background

The Bank Secrecy Act of 1970 outlines various laws and regulations to prevent the financing of terrorism and money laundering. In 1990, the government created FinCEN to enforce the provisions of the Bank Secrecy Act. FinCEN uses FBAR to monitor U.S. persons’ finances and detect illegal activities. 

Who Needs to File an FBAR?

You must file an FBAR if you:

1. Are a U.S. person for tax purposes who
2. Owns, has a financial interest in, or signature control over
3. One or more foreign financial accounts
4. With a combined value of $10,000 or more
5. At any point during a calendar year. 

The sections below unpack each requirement in further detail. 

U.S. Person for Tax Purposes

For tax purposes, a U.S. person includes the following:

• U.S. citizen: Anyone born in the United States or naturalized as a U.S. citizen.
• Resident alien: An individual who is not a U.S. citizen but meets either the green card or substantial presence test.
• U.S. partnerships: Any partnership formed or organized in the United States or under U.S. law.
• U.S. corporations: Any corporation formed or organized in the United States or under U.S. law.
• U.S. estates: Estates of deceased U.S. citizens or residents.
• U.S. trusts: Trusts that are under U.S. court jurisdiction and control by U.S. persons.

Ownership, Financial Interest, and Signature Authority

The second requirement for FBAR filing pertains to your authority over a foreign account. You must file an account on your FBAR if you own or have a financial interest in such an account.

“Financial interest” refers to beneficial ownership and triggers a reporting requirement. 

Consider the following example: Person A, a U.S. citizen, asks Person B, a Canadian citizen, to hold $20,000 in B’s Canadian bank account. In this case, A is not the foreign account owner, but they have beneficial ownership in the account. As a result, A must report the account to the Department of Treasury.

Additionally, you must report a foreign account to which you hold signature authority. For example, suppose you have control over the disposition of funds or assets in your employer’s offshore account and can authorize transactions on behalf of the account owner. In that case, you must report the account using FinCEN Form 114.

One or More Foreign Financial Accounts

Foreign bank and financial account reporting pertains to all your accounts outside the 50 states, the District of Columbia, and the U.S. possessions. The reportable account types include bank accounts, securities accounts, retirement accounts, and investment funds. You may also need to report annuity or life insurance contracts with a cash value you hold with foreign insurers. 

A Combined Value of $10,000 or More

You only need to report your foreign bank accounts if they meet the $10,000 threshold. However, this threshold applies to the total balance of all relevant foreign assets.

Consider the following example: Person C, a Canadian citizen and Permanent Resident cardholder, owns the following Canadian accounts:

• A Royal Bank of Canada savings account with a balance of 3,000 USD
• A Registered Retirement Savings Plan with a balance of 7,500 USD

In this case, each account’s balance is lower than $10,000. However, the accounts’ combined value equals $10,500, which means C must report both these accounts. 

The combined balance exceeding $10,000 constitutes a reporting requirement, even if it was a one-time occurrence. Here is another example:

Person C has only one foreign account with a balance of around $6,000 from January to September. During October, C pays $60,000 into the account. Then, in November, C uses the $60,000 for a real estate deposit. When the year ends, the account balance is $6,000 again. 

In this example, the funds in C’s account exceeded $10,000 for a period, which means they must report the account. 

FBAR Filing – General Information

You must file an FBAR electronically via FinCEN’s Bank Secrecy Act E-Filing portal. If you want to complete this form manually or submit it by mail, contact FinCEN’s Resource Center and request an e-filing exemption. At The W Tax Group, we recommend consulting a reputable tax professional to ensure that you avoid some of the common pitfalls and complete the process correctly. 

Calculating Maximum Values

Start by pulling the account statements from the financial institutions housing your foreign accounts. Then, calculate the maximum value, which is a reasonable approximation of your accounts’ highest total value during the calendar year. You do not need to file the report if your accounts’ combined value was never higher than $10,000 during the year. 

Under United States law, FBAR filings must reflect your account’s value in USD and not the currency of the country where your account is. Use the U.S. Treasury’s currency exchange rate to convert your accounts’ maximum value from foreign currency to US dollars. The Treasury’s website also lists historic change rates from each quarter to 2001. 

If the Treasury does not provide an exchange rate for the currency or period, you can use any verifiable exchange rate, provided that you list the rate’s source in your filing. 

Important Deadlines for Submission

Depending on your foreign accounts’ aggregate value, you need to file an FBAR annually. The deadline for FBAR filings is April 15, the same deadline as for your income tax return, though you must file your return and FinCEN Form 114 separately.

Taxpayers who claim Foreign Earned Income Exclusion (FEIE) generally receive a deadline extension until June 15. However, even if you do not claim FEIE, an automatic extension to October 15 applies, and you do not need to request this extension. 

Forms and Documents for FBAR Filing

You must report foreign accounts using FinCEN Form 114. This primary form required for FBAR filing consists of six sections. Here is an overview of how to fill out the form.

Part I: Filer Information

Choose your filing status and provide your U.S. taxpayer I.D. or foreign identification number.

You must also enter your name, date of birth, and address. Indicate whether your report applies to more than 25 foreign accounts.

Part II: Account Information

Report the highest value of each account in USD. For each account, provide the name of the foreign financial institution, the account type, the account number, and the institution’s address.

Part III: Jointly Owned Accounts

Follow the same steps as Part II, but this section is specifically for accounts you own with someone else, like your spouse.

Part IV: No Financial Interest Information

Complete this section if you have the authority to sign for certain accounts but don’t have a financial interest in them.

Part V: Consolidated Report

If you’re a U.S. business entity with more than a 50% interest in another entity required to file an FBAR, you can file a consolidated report for both entities.

Final Section: Submission

Check box 44a, provide your title, and electronically sign the form on the home tab. You can save and print the form from the home tab.

Once the form passes the validation check and shows no errors, the “Ready to File” button will become clickable, allowing you to submit the form.

Exceptions and Exemptions

Certain individuals and accounts are exempt from FBAR reporting requirements:

U.S. IRAs and Tax-Qualified Retirement Plans

If you are the owner or beneficiary of an Individual Retirement Accounts (IRA) that houses a foreign account, you do not need to report the account. Similarly, suppose you are a participant in or beneficiary of a tax-qualified retirement plan that holds a foreign account. In that case, you do not need to report the account on the FBAR.

Certain Governmental and International Financial Institution Accounts

You do not need to report a foreign account that is held by:

• A U.S. military banking facility 
• A financial institution of the U.S. government 
• An international financial institution of which the U.S. is a member

Trust Beneficiaries

If you are a trust beneficiary with a financial interest in the trust’s foreign financial accounts, you do not need to report the accounts on an FBAR if the trust, its trustee, or its agent: 

• Is a U.S. person and
• Filed an FBAR that discloses the foreign accounts

Correspondent/Nostro Accounts

Correspondent or nostro accounts, which banks maintain and use solely for bank-to-bank settlements, are exempt from FBAR filing.

These exemptions are subject to specific conditions, and the rules can be complex. If you believe you qualify for an exemption, consult with us at The W Tax Group to ensure compliance with FBAR reporting requirements.

FBAR Penalties

Failing to file the Foreign Bank Account Report (FBAR) or incorrectly filing it can result in significant penalties. These non-compliance penalties vary, depending on whether the violation is non-willful or willful.

Non-Willful Violations

A non-willful violation occurs when an individual fails to file an FBAR or incorrectly reports their foreign accounts without intent to evade taxes. The penalty for a non-willful violation is $10,000, but this amount adjusts with inflation every year. For 2022, the penalty was $14,489 per violation. 

Note that the ruling in a recent Supreme Court case, Bittner V. the United States, the court ruled that the penalty applies per form not per account. For instance, if you had 10 foreign accounts that you didn’t report over two years, the penalty will be multiplied by two for the number of FBAR reports not filed. It will not be multiplied by 10, the number of accounts you didn’t report. 

Willful Violations

Willful violations occur when someone knowingly fails to file an FBAR or deliberately provides inaccurate information. The penalties for willful violations are much more severe. They can be as high as $100,000 indexed to inflation ($144,886,000 as of 2022) per violation or 50% of the account balance at the time of the violation, whichever is greater. 

Paying FBAR Penalties

If you are subject to FBAR penalties, you must pay them to the Department of the Treasury. Pay these penalties immediately to avoid additional fines and interest.

Appealing FBAR Penalties

If you believe that the FBAR penalties assessed against you are unjustified, you may have the option to appeal. Consulting with a tax professional or attorney who specializes in FBAR compliance can provide guidance on the appeals process and help you build a case.

IRS Form 8938: Statement of Specified Foreign Financial Assets

Under the Foreign Account Tax Compliance Act (FATCA), U.S. taxpayers with foreign assets, investments, and accounts must disclose this information using IRS Form 8938. In some cases, you may need to file both an FBAR and a statement of foreign financial assets, while in other situations, you may only need to file one of these forms.

Form 8938 requires you to report “specified foreign financial assets” directly to the IRS. Foreign financial institutions must also report U.S. account holders to the IRS. Over 110 countries have agreements with the U.S. under FATCA.

Some common examples of assets that you must report using Form 8938 include foreign bank accounts, investment accounts, securities accounts, mutual funds, trusts, retirement plans, business accounts, and life insurance policies.

IRS Form 8938 – Filing Thresholds

Form 8938 has various thresholds for filing, depending on whether you are a U.S. resident or non-resident and filing jointly or separately. 

U.S. residents must file Form 8938 if:

• They are single or married and file their returns separately, and the value of their specified foreign financial assets was over $50,000 on the tax year’s last day. These taxpayers must also file Form 8938 if the assets’ value exceeds $75,000 at any point in time during the year.
• They are married joint filers, and the value of their specified foreign assets was over $100,000 on the last day of the tax year or over $150,000 at any time during the year.

Non-U.S. Residents must file Form 8938 if:

• They are single or married and file their returns separately, and the value of their specified foreign financial assets was over $2000,000 on the tax year’s last day. These taxpayers must also file Form 8938 if the assets’ value exceeds $300,000 at any point in time during the year.
• They are married joint filers, and the value of their specified foreign assets was over $400,000 on the last day of the tax year or over $600,000 at any time during the year.

The deadline for filing Form 8938 is the same as your tax return, typically in April for U.S. residents, June for foreign residents, and October with an extension. There is also a special circumstance extension that goes until December.

The main difference between Form 8938 (FATCA) and FBAR is the agency to which you report and the types of assets you must disclose. Form 8938 is reported to the IRS and includes a broader range of assets, while FBAR is reported to FinCEN and primarily focuses on foreign bank accounts. 

Becoming FBAR Compliant

If you have one or more delinquent FBARs, filing the relevant forms is crucial to ensure compliance and prevent severe penalties. The process for late FBAR filings depends on your circumstances. 

For example, you can follow the standard filing process if you meet specific requirements. For example, if you are tax compliant and provide a statement explaining why your FBAR filing is late, you may avoid penalties. 

If the Department of Treasury has already contacted you about delinquent FBAR filings, an examiner will likely do an investigation and assess penalties against you. An examiner may only issue a warning without penalties, depending on your situation. 

Under the Offshore Voluntary Disclosure Initiative (OVDI), you can minimize tax penalties by voluntarily reporting your foreign accounts. However, this amnesty may no longer be available if the IRS has contacted you regarding your FBAR filings. 

Avoid FBAR Penalties and Get Help Now

An FBAR filing can be a time- and labor-intensive process that may be tempting to put off. However, the penalties resulting from a delinquent report can jeopardize your financial security, and ensuring FBAR compliance should be your priority. 

At The W Tax Group, we have the expertise and experience to help you navigate the FBAR filing process or any other tax problems. Whether you need assistance filing your report for the first time or require representation during an investigation, we can provide you with a personalized solution designed to help you achieve a favorable outcome. 

Contact us today to schedule an initial consultation and take the first step toward FBAR compliance. 

Frequently Asked Questions:

What distinguishes FBAR filing from FATCA reporting requirements?

FBAR (FinCEN Form 114) requires U.S. persons with foreign financial accounts exceeding $10,000 at any time during the year to report to FinCEN. FATCA (Form 8938) mandates U.S. taxpayers to report specified foreign financial assets if they exceed certain thresholds, which vary based on filing status and residency. Both aim to prevent tax evasion but have different reporting criteria and thresholds.

How do currency fluctuations affect FBAR reporting thresholds?

Currency fluctuations can impact FBAR reporting thresholds because the $10,000 threshold refers to the total value of foreign financial accounts in U.S. dollars. An exchange rate change affects whether the account value exceeds the threshold.

Are retirement accounts in foreign countries reportable on FBAR?

Yes, retirement accounts in foreign countries are generally reportable on FBAR if the total value of all foreign financial accounts, including the retirement account, exceeds $10,000 during the calendar year. These accounts include pensions, annuities, and other retirement savings accounts. 

What should I do if I discover an unreported account after the deadline?

If you discover an unreported account after the FBAR deadline, you should file a delinquent FBAR as soon as possible and explain the late filing. Please consult with us at The W Tax Group to assess your situation. To mitigate penalties, we will also explore your options, like the IRS Voluntary Disclosure Program or Streamlined Filing Compliance Procedures.

How does the IRS determine “willful” vs. “non-willful” non-compliance?

The IRS determines “willful” vs. “non-willful” FBAR non-compliance according to a filer’s intent. “Willful” means the intentional failure to file an FBAR and may involve deceit or a conscious effort to avoid detection. “Non-willful” means the failure was due to negligence, inadvertence, or mistake, and there was no intent to evade tax laws.

Can the statute of limitations expire for FBAR penalties?

Yes, the statute of limitations for FBAR penalties is generally six years from the due date of the FBAR. In other words, the IRS has six years to assess penalties for non-compliance. After this period, the IRS cannot impose penalties for that specific year’s FBAR non-compliance.

Is it possible to amend a previously filed FBAR?

Yes, it is possible to amend a previously filed FBAR. If you need to correct or update information on an already filed FBAR, you can file a new FBAR and check the “Amended” box on the form. 

Can my spouse file on my behalf?

If you have a joint foreign financial account, your spouse can file on your behalf. You can file an FBAR that includes all required information for both spouses. However, both spouses must sign the form, and specific authorization may be required depending on your filing method.

Which records must I keep as an FBAR filer?

As an FBAR filer, you must keep the following records for each account you report on an FBAR:

• Account name,
• Account number,
• Foreign financial institution’s name and address,
• Account type, and
• Maximum values of each account during the reporting period. 

According to the IRS, filers must keep these records from the FBAR due date for five years.