If you’re an American expat with a foreign bank account, you may have special reporting obligations with the U.S. Department of Treasury. This reporting obligation is focusing on the disclosure of your foreign – non-U.S. financial assets and bank accounts, rather than on tax liability. However, the IRS can question the legitimate source of funds in your non-U.S. bank accounts, as well as whether such funds have been subject to tax. Report of Foreign Bank and Financial Accounts (FBAR) is filed with the U.S. Treasury electronically on Form FinCEN 114.
There is an additional reporting requirement for U.S. expats on Form 8938, Statement of Specified Foreign Financial Assets, commonly referred to as “FATCA Form.” Form 8938 is required to be filed with the Internal Revenue Service (IRS) and attached to the individual’s U.S. income tax return. Compared to FBAR that is filed on a standalone basis, Form 8938 is not required to be filed with the IRS if you do not meet the U.S. income tax filing requirement – Form 1040.
In this article, we cover what you need to know prior to filing your FBAR, important deadlines, and who is required to file FBAR.
Overview of FBAR
Whether you reside in the United States or abroad, U.S. persons (including U.S. citizens, Green card holders, and U.S. residents) may be subject to the FBAR reporting if they own, are a nominee, or otherwise control or have financial interest in a non-U.S. account. This includes individuals who have signatory authority over applicable non-U.S. bank accounts and joint accounts, even if the other account holder is a non-U.S. person. Importantly, whether or not the account generated taxable income does not affect its status as a “foreign financial account” for FBAR purposes.
FBAR’s general filing deadline is April 15. However, there is currently an automatic extension until October 15. No affirmative action is required by the taxpayer to be eligible for this extension – it applies by the operation of law. Taxpayers will be well advised to confirm every year whether the automatic extension is still in effect.
The April 15 tax filing deadline coincides with the general deadline for filing one’s U.S. tax return. Due to COVID-19, the IRS has extended the April 15 tax filing and payment deadline to July 15, 2020 for the 2019 tax year. The U.S. Treasury did not extend the April 15 deadline for FBAR filing, but, as discussed above, the automatic extension effectively moves that deadline to October 15.
If you have non-U.S. bank accounts or financial assets, you must complete Schedule B, Part III on your tax return, even if you do not have interest income or are not required to file an FBAR (see the filing thresholds below). In addition, if you meet certain amount thresholds, you may be required to file Form 8938 in addition to your FBAR.
U.S. citizens and Green card holders are taxed in the United States on their worldwide income, and this includes income stemming from foreign trusts, foreign banks and securities accounts, which typically is comprised of passive income (such as interest or dividend income).
Who Must File an FBAR
FBAR is required to be filed by a U.S. person who (U.S. person generally includes U.S. citizens, long-term residents – Green card holders, U.S. residents, corporations, partnerships, trusts and estates):
- Has a financial or signatory interest in or other authority over any non-U.S. financial account;
- The aggregate value of foreign financial accounts exceeds US $10,000 during the calendar year.
Note that if you meet the US $10,000 threshold with respect to all of your non-U.S. accounts, you must disclose even those accounts that have zero value or balance.
Why Would you File FBAR?
First and foremost, you are required to file FBAR if you are subject to FBAR filing because it is the law.
Second, noncompliance with FBAR disclosure and filing obligations, as well as recordkeeping requirements may lead to substantial civil or even criminal penalties.
The maximum civil penalties applicable for FBAR violations for the 2019 tax year are as follows:
- Willful violations – US $129,210 (this amount is indexed for inflation) or 50 percent of the highest balance in the account at the time of the violation, whichever is greater.
- Non-willful violations – US $12,921 per violation (the IRS has been applying this penalty more liberally).
- No penalty is imposed if the failure to file (or file timely) FBAR was due to non-willful conduct and reasonable cause. The reasonable cause is a high standard to meet and the ignorance of the law alone is generally not sufficient to establish reasonable cause.
You should talk to your U.S. tax advisor to determine if any of the above penalties may apply to your situation and how, if applicable, they may be mitigated.
How To Go About Filing FBAR
The good news is that completing FBARs is not overly complicated. You should be able to do it yourself. In fact, unless you’d rather pay the tax return preparer for due to the value of your time or if you want to make sure that the filing is done right, you can fill out and file FBARs on your own. In some cases, tax return preparers may agree to review your draft FBAR, if such a review is important to you – it may cost the same or be less expensive, depending on each tax return preparer’s policies.
Even if you file your own FBARs, you would be required to provide the account information to your U.S. tax advisor so that they can determine whether Form 8938 would be required as well. Note that there are certain non-U.S. financial assets that are reported on Form 8938, while they are excluded from reporting on FBAR. Depending on your scenario, you would need to make a decision as to whether you would want everything done in one place or split the job between your tax return preparer and yourselves.
Although very limited exemptions exist (and they require contacting FinCEN helpline and obtaining an approval for paper filing), FBARs must be filed electronically with the Financial Crimes Enforcement Network’s BSA E-Filing interface.
Married taxpayers can, in very limited situations, file a joint FBAR, if the account is owned jointly with their spouse and if only one or none of the two parties have a separate account. In all other circumstances, each spouse must submit their own FBAR.
Records to Be Maintained
For every account subject to disclosure on FBAR, you must generally maintain the following records for at least five years from the due date of the FBAR filing:
- Name on the account;
- Account number;
- Name and address of the foreign financial institution where the account is held;
- Type of account; and
- The maximum value during the year.
There are no specifications as to the type of document needed to maintain this information, it can be a bank statement or a copy of a filed FBAR as long as all the information is detailed therein.
What to Do if You Failed to File Your FBAR Timely or Haven’t Filed FBAR at All?
If you failed to file FBAR when you were required to do so, you can still become compliant by using one of the IRS amnesty programs.
If FBAR is the only disclosure you failed to make on time (or make it at all) and provided that you did not deliberately failed to comply with the FBAR reporting obligations, you should be able to use the IRS Delinquent FBAR Submission Procedures to become compliant. There are certain requirements that you need to meet, but if you do qualify, the IRS typically would not assess FBAR penalties.
In you also need to amend your U.S. tax returns, along with filing FBARs, and, once again, provided that you did not willfully violated the law, you may qualify for the IRS Streamlined Filing Compliance Procedures. No penalty applies to taxpayers who reside outside the United States and met the non-residency test – they can use IRS Streamlined Foreign Offshore Procedures. For taxpayers residing in the United States, a 5 percent miscellaneous offshore penalty may apply, but otherwise other penalties would be forgiven – they can use the IRS Streamlined Domestic Offshore Procedures. Both these IRS amnesty programs contain various detailed requirements and you should review them carefully to make absolutely sure you qualify for the provided relief.
If you are considering renouncing your U.S. citizenship and have not been tax and FBAR compliant, you can use IRS Relief For Certain Former Citizens. Although FBARs are technically not required to be filed under that IRS procedure, the IRS recommends doing so. Again, there are detailed requirements to be eligible for this IRS program, including non-willful conduct.
Finally, if you believe there is a possibility of potential criminal prosecution and/or you may have willfully violated the law, you can become compliant by using the IRS Offshore Voluntary Disclosure practice. This program comes with civil penalties, but would protect you, provided you meet applicable requirements, from potential criminal prosecution.
If you failed to file FBAR or did not file it timely, or if you failed to include certain bank accounts on your previously filed FBAR, talk to your U.S. tax advisor and discuss your options. You should become compliant as soon as possible, while the IRS still has the amnesty programs discussed above open. These programs can be closed any time, with or without significant notice.