One of the most common compliance reports those with foreign assets may face is the filing of Foreign Bank Account Reports (FBARs).
For decades, U.S. persons with foreign assets have had to remain in compliance with the Banking Secrecy Act. Non-compliance can have severe consequences. Here’s what you need to know about reporting foreign assets and foreign financial accounts.
Pan-global Bank Secrecy laws, intended to allow financial account holders privacy, were misused by U.S. taxpayers.
Many U.S. taxpayers used foreign accounts and rules to hide some of their assets and income from the U.S. tax authorities.
The U.S. Bank Secrecy laws are intended to ensure U.S. taxpayers disclose, not hide, their foreign financial accounts. And non-compliance can mean severe penalties, even criminal penalties, as have been applied in some recent cases.
Unlike FATCA, the FBAR rules are administered by the U.S. Treasury Department’s Financial Crimes Enforcement Network and enforced by the U.S. Internal Revenue Service (IRS). While the name of the agency implies some sort of illicit criminality, FBAR filings are incredibly common—and are required for any U.S. persons with foreign financial accounts in excess of $10,000.
Curious about how the recent Tax Cuts and Jobs Act of 2017 impacts FBAR? Largely, foreign reporting requirements remain unchanged, despite tax reform.
While the Foreign Account Tax Compliance Act (FATCA) has provided U.S. persons with foreign assets guidance on how to get compliant with the IRS since 2009, the Treasury Department has demanded their compliance via the Banking Secrecy Act (BSA) since 1970.
In the decades following the passage of the BSA, Americans with foreign financial accounts have been required to file Foreign Bank Account Reports (FBARs) (as of September 2013, called FinCEN Form 114, Report of Foreign Bank and Financial Accounts). Unlike forms associated with FATCA, FBAR requirements (31 CFR 103.24) demand compliance with FinCEN, the Financial Crimes Enforcement Network within the Treasury Department.
Don’t believe us? See Paul Manafort, President Trump’s former campaign advisor, for an example of how not filing an FBAR can turn out.
FBAR and FACTA and Form 8938
How does FACTA apply to individuals? U.S. taxpayers with even the smallest interest in a foreign financial asset must file IRS form 8938 if they meet the filing threshold requirements. In fact, it’s much more likely for U.S. persons with foreign assets to be required to fill out FinCEN Form 114 than those associated with FATCA. The reason is that FinCEN broadly requires compliance from any U.S. persons with financial interests in, or signature authority over, foreign financial accounts with a total value exceeding $10,000 during the calendar year.
So, think about it: If a U.S. taxpayer lives abroad and has to pay their expenses in foreign currency, they may have an FBAR filing requirement.
How common is FBAR compliance? The most recent statistics are from the IRS for tax year 2015. The IRS noted that an all-time high 1,163,299 FBARs were filed in 2015—an increase of eight percent from the year before. What’s more, that growth isn’t completely shocking, as some other statistics report that FBAR filings have grown on average by 17 percent over the past five years. This steady increase is thanks in part to the FATCA rules and the IRS Voluntary Disclosure initiatives.
It should be noted that because of FATCA regulations, which require foreign financial institutions to report to the U.S. government accounts in which a U.S. person is the account holder or has sufficient interest or control, the IRS is able to cross-check and match foreign account activity to their U.S. income tax returns and FBAR.
FBAR Filing Requirements: Who Needs to File an FBAR?
According to the law, a U.S. person is required to file an FBAR if:
- They have a financial interest in, signature, or other, authority over at least one financial account located outside of the U.S. (Some limited exceptions apply.)
- The aggregate value of all their foreign financial accounts exceeds $10,000 at any time during a calendar year.
What’s more, a U.S. person can be considered to have a “financial interest” in an account when the owner of record or holder of the entities’ legal title is any of the following:
- A person acting on behalf of a U.S. person with respect to the account, including agents, nominees, and attorneys.
- A corporation, foreign or domestic, in which the U.S. person owns (directly or indirectly) more than 50% of the total value or more than 50% of the voting power of all shares of stock.
- A partnership, foreign or domestic, in which the U.S. person owns (directly or indirectly) an interest in more than 50% of the partnership’s profits or capital.
- A trust in which the U.S. person is the grantor and has an ownership interest in the trust for U.S. federal tax purposes.
- A trust, foreign or domestic, in which the U.S. person has a greater than 50% direct or indirect present beneficial interest in the trust’s assets, or receives 50% of the income.
- Any other entity in which the U.S. person owns (directly or indirectly) more than 50% of the voting power, total value of equity or assets, or profits’ interest.
Some exceptions to filing an FBAR include:
- United States persons included in a consolidated FBAR;
- Correspondent/Nostro accounts;
- Foreign financial accounts owned by a governmental entity;
- Foreign financial accounts owned by an international financial institution;
- Owners and beneficiaries of U.S. IRAs;
- Participants in and beneficiaries of a U.S. tax-qualified retirement plan;
- Certain individuals with signature authority over, but no financial interest in, a foreign financial account;
- Trust beneficiaries (but only if a U.S. trustee reports the account on an FBAR filed on behalf of the trust);
- Foreign financial accounts maintained on a United States military banking facility.
For more information on FBAR filing, contact us to speak with a skilled international tax practitioner.
The BSA states that there are two general penalties for non-compliance. First, a negligence penalty of $500 may be assessed against a business for an FBAR violation. Second, if it becomes a pattern, a penalty up to $50,000 may be assessed. These negligence penalties generally apply only to businesses, and not individuals. But that changes in the case of both non-willful and willful violations.
- Non-willful Violations: A maximum penalty of $10,000 may be imposed on any individual person who violates the FBAR filing and recordkeeping requirements that are not due to reasonable cause.
- Willful Violations: In the case of willful violations, the penalties are much more severe. Individual persons who willfully fail to report (or avoid reporting) an account are subject to a penalty equal to whichever sum is larger: either a $100,000 penalty or a penalty equal to 50 percent of the balance in the violating account (31 U.S.C. Section 5321(a)(5)) (IRM Section 18.104.22.168.5). Wait, there’s more: willful violations may also be subject to criminal penalties under 31 U.S.C. Section 5322(b) or 18 U.S.C. Section 1001, and loss of foreign tax credits.
What Can a Taxpayer Do if they have Shirked FBAR Filing Requirements?
Taxpayers who have not filed a required FBAR and are not under civil or criminal investigation by the IRS can file any delinquent FBAR through the BSA E-Filing system. (They just need to include a letter explaining why their submission is late.) Generally, the IRS will not impose a late penalty on taxpayers as long as upon filing the delinquent FBAR, it is properly reported and the taxes are paid on their U.S. tax return.
FBAR Filing Requirements: In Conclusion
In the end, noncompliance can be incredibly costly. Between FBAR and FATCA, the IRS and U.S. Treasury are very committed to collecting what is owed—and to opening more avenues to help those who are noncompliant avoid harsh penalties and criminal prosecution. For more on this subject, see our section on Voluntary Disclosures.
We hope this information has helped give you gain a better understanding of how critical it is for U.S. taxpayers with foreign assets to meet FinCEN and FBAR requirements. For an in-depth look at how best to retain the maximum benefits from your foreign assets while staying in compliance, contact IWTA’s founder Jack Brister.
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