Reporting of Foreign Accounts
Most Americans filing a US tax return know that interest and dividends are reported on Schedule B. You may even be aware of a little box at the bottom of the page that asks if you have an interest in a foreign account in a foreign country. But you may not know just how important it is to understand the rules surrounding this little box and the HUGE potential for penalties if the rules are not followed.
So…knowing that most Americans overseas have foreign bank accounts and foreign investments as part of the normal structure of their lives, let’s review who is subject to these rules, how to comply, and the consequences of NOT complying.
WHAT IS THE BASIC RULE FOR REPORTING FOREIGN ACCOUNTS?
If you are a US person, AND you have a financial interest in or signature or other authority over any financial accounts in a foreign country, AND the aggregate value of the accounts exceeded $10,000 at any time during the filing year, a FinCEN Form 114 (FBAR) must be filed.
WHO IS A “US PERSON”?
Obviously, this term includes individual taxpayers who are citizens or residents of the US, but it also encompasses US corporations, partnerships, estates and trusts.
WHAT IS “A FINANCIAL INTEREST IN OR SIGNATURE OR OTHER AUTHORITY OVER”?
This phrase has a broad sweep that will cover, in addition to direct owners, many officers, directors, shareholders, members, managers and partners of entities with foreign financial accounts as well as trustees, beneficiaries and protectors of trusts.
If you are any of the above-named, apart from a direct owner, you should consult a tax professional to see if you need to file this form.
WHAT IS A “FINANCIAL ACCOUNT” FOR PURPOSES OF THIS FORM?
This term includes bank accounts, investment accounts, mutual funds, securities and other brokerage accounts , cash value life insurance policies, cash value annuities, AND retirement savings accounts.
You do not need to report accounts held at US military banking facilities, accounts held at banks located in Guam, Puerto Rico and the US Virgin Islands, or US-based accounts held by a branch or division of a foreign bank.
WHAT FORMS NEED TO BE FILED—AND WHEN—AND WHERE
If you happen to have, at any time during the course of the year, a total of more than $10,000 in the accounts described above (even if you don’t have that much at the end of the filing year), you will need to do TWO things:
- Fill in Part III of Form 1040, Schedule B, Interest and Ordinary Dividends (or the corresponding form for a corporation)—and file that schedule with your federal tax return. You MUST file Schedule B even if you would not otherwise be required to file it to report interest and dividends. AND if you don’t include Schedule B, it is considered to be a failure to file a complete return.
- Prepare the FBAR and file electronically through the BSA E-Filing System (https://bsaefiling.fincen.treas.gov/).
Filers will receive an acknowledgement once the form has been e-filed. You will have to include certain information about yourself, such as name, address, taxpayer identification number, as well as specifics about each account to include the location of the account, the account number and its maximum value during the year.
This filing deadline is April 15th of the year following the tax year. There is an automatic extension (no request required) to October 15th, which effectively makes this later date the filing deadline.
WHAT HAPPENS IF YOU DON’T FILE?
The penalty for failing to file can be severe. In the case of a non-willful failure to file, the penalty can be upwards of $10,000.
In cases of willful failure to file, the penalty is significantly more--$100,000 or 50% of the amount of the value of the unreported accounts—whichever is greater. Civil penalties can be assessed anytime up to six years after the date of the violation. There are also criminal penalties for willfully not filing.
CAN A PENALTY BE WAIVED?
It appears that in cases of non-willful failure to file, the penalty may be waived if any income from the foreign accounts was properly reported on your federal income tax return AND there was reasonable cause for not filing.
WHAT IF YOU MISSED THE DEADLINE?
If you are late in filing (after August 15th) you should still file. The FBAR form has a drop-down menu with reasons for your late filing—such as you were unable to get information from the foreign financial institution in a timely manner. You just select what applies to you or write in your own reason. You should also file for previous years if you have not already done so and determine that you should have. The form allows you to enter the calendar year reported. If the IRS determines there was reasonable cause for the late filing, no penalty will be imposed. It is better to file late than not at all!
WHAT If YOU WANT TO CHANGE THE INFORMATION YOU REPORTED?
You can amend a previously filed FBAR at the BSA E-Filing System website.
WHY DOES THIS FORM EXIST?
The FBAR was developed under the Bank Secrecy Act in an effort to locate Americans using foreign bank accounts to commit tax evasion. It is therefore not a federal income tax form—although enforcement is carried out primarily by the IRS.