FBAR (Report of Foreign Bank and Financial Accounts)
The government filed a lawsuit against a person seeking $4 million in penalties for his failure to report personal foreign accounts as well as foreign business accounts over which he had signatory authority. That’s not chump change. Under the Bank Secrecy Act, each year you must make an annual report to the U.S. Treasury if you hold certain foreign financial accounts. This annual report is referred to as FBAR (it’s FinCEN Form 114, Report of Foreign Bank and Financial Accounts). The failure to file if required to do so can result in substantial penalties (as illustrated by the above case), especially if the failure is willful, so understand whether this obligation applies to you and how to meet it on a timely basis.
Do you have to file?
The reporting requirement applies not only to individuals who are U.S. citizens and residents, but also to U.S. corporations, partnerships, limited liability companies, and trusts and estates. But it only applies if 2 conditions are met:
- A person has a financial interest in or signature or other authority over at least one financial account (bank account, brokerage account, mutual fund) located outside the U.S. Having a financial interest means have the power to withdraw funds; it is not simply someone who can authorize payments. More precisely, “it is any person (alone or in conjunction with another), to control the disposition of money, funds, or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained.” To determine whether an entity has a financial interest in a foreign account, a 50% or more ownership test applies.
- The aggregate value of the account(s) exceeded $10,000 at any time during the year. The threshold depends on assets, not income; whether or not the account is profitable or had any income is irrelevant for FBAR reporting (profitability and/or income only impact income tax reporting). The $10,000 threshold is not adjusted annually for inflation.
Certain foreign financial accounts (FFAs) are exempt from FBAR. For example, the Treasury has indicated informally that cryptocurrency accounts are not subject to FBAR reporting. A list of exempt accounts can be found at the IRS.
How do you file?
The FBAR report is not filed with a tax return; it isn’t even sent to the IRS. It must be filed electronically with the U.S. Treasury using the BSA E-filing System. But don’t wait until the last minute to file if you haven’t registered to become a BSA E-Filer.
- For individuals owning an FFA, the report is made by the individual (special rules apply to spouses who jointly own accounts so that only one spouse needs to file the report). If an individual has a business or owns property abroad for which there is an FFA, the individual must file the report if he or she has signature authority, even if there is a local registered agent for the business.
- For corporations owning an FFA, the report is made by CFO or other person with signatory authority. (Special rules apply to publicly-traded corporations.)
- For pass-through entities owning an FFA, the report is made by individual with signatory authority (e.g., the managing partner of a general partnership).
A single report is made for a taxpayer’s multiple accounts. But multiple filings for the same account(s) may be required in some situations. For instance, if an individual who is a U.S. citizen owns 100% of an LLC in the U.S. that holds a foreign financial account, both the individual and the LLC have to file an FBAR even though the LLC is a disregarded entity for U.S. income tax purposes.
When do you file?
The annual report is due on the same date as federal income tax returns for individuals, whether or not the filer is an individual. So, the 2018 report was initially due on April 15, 2019. But the Treasury has given an automatic 6-month extension (no request is necessary), making the deadline for filing the 2018 return by October 15, 2019.
Check that this filing requirement is being handled by your CPA or other tax return preparer if you don’t do it yourself. Don’t assume that your preparer will automatically submit an FBAR account for you (he or she may not even know you have overseas accounts).