Every year, on April 15th, certain U.S. individuals are required to complete FinCEN Form 114, Report of Foreign Bank and Financial Accounts, otherwise known as the “FBAR.” The FBAR is granted an automatic 6-month extension, giving the report a final due date of October 15th. However, unlike individual income tax returns, the FBAR must be electronically filed with the Financial Crimes Enforcement Network (FinCEN). For the 2019 calendar year, filing dates are extended until October 31, 2020, for all filers. However, filers impacted by recent natural disasters have until December 31, 2020.
The FBAR must be filed by U.S. persons who have a financial interest in, or signature authority over, any financial account located outside of the United States that has an aggregate max value exceeding $10,000 during the calendar year. An account is considered foreign when it is physically located outside of the U.S. For example, an account managed by a U.S.-based German bank would not be considered a foreign financial account. Still, an account managed by a U.S. bank physically located in Germany would be considered foreign. A U.S. person is required to file an FBAR if the aggregate value of all foreign financial accounts exceeds USD 10,000 at any point during a calendar year. If the assets are reported in a foreign currency, they must be converted to USD using the foreign exchange rate on the last day of the respective calendar year.
Who is considered a “U.S. person”?
- A U.S. person is a U.S. citizen or resident, an entity created in the U.S. or under U.S. laws (Partnerships, Corporations, S-Corporations, and Limited Liability Companies), and trusts or estates formed under U.S. law. Disregarded entities for tax purposes may be required to file an FBAR as the tax treatment of an entity does not affect FinCEN filing requirements.
What is considered a “financial account”?
- Financial accounts include, but are not limited to, bank accounts, brokerage or other securities related accounts, insurance policies with a cash value, mutual funds or other similarly pooled funds, or any other accounts maintained in a foreign financial institution or by a person performing the services of a financial institution.
What is considered a “financial interest”?
- The term financial interest is not specifically defined, but it applies when a U.S. person is the owner of record or holder of legal title for a foreign financial account, regardless of whose benefit the account is maintained.
What does it mean to have a “signature authority”?
- Signature authority over a foreign financial account means a U.S. person, regardless of ownership, has the authority to control the disposition of the assets held in the foreign financial account.
A general understanding of these terms will help in determining whether you may be subject to FBAR filing requirements. However, as with most general rules, there are several exceptions. The first filing exception is for IRA owners and beneficiaries. If you are the owner or beneficiary of an IRA account that happens to own foreign financial accounts, you are not required to report those accounts. The same situation exists for participants of a tax-qualified retirement plan. It is important to note however, that if the foreign financial accounts were owned by the individual rather than the IRA or retirement account, they would have to be included on the FBAR.
There is also an exception for consolidated FBARs. For example, if an individual owns a foreign financial account and they also have a 50% interest in a partnership that owns a foreign financial account, the individual can report both financial accounts on their individual FBAR and the partnership would not be required to file its own FBAR. It is important to understand the FBAR filing requirements as you could potentially be subject to large penalties for failure to file.
While it is a complex topic, it is important to determine if you are subject to the FBAR filing requirements. The current penalty for a non-willful violation of FBAR filing is a maximum of $10,000 per violation. The penalties for willful violation of FBAR filing are more severe. The civil penalty for willful violation of FBAR filing is the greater of $100,000 or 50% of the value of all foreign financial accounts at the time of the violation. The criminal penalty for a willful violation is up to $250,000 and/or 5 years in federal prison. Penalties assessed on the taxpayer from the IRS are considered “stackable,” which means the IRS has the ability to “stack on” multiple penalties related to the same unreported foreign financial accounts. It is important to note that FBAR penalties can be assessed after death. In recent court cases, courts have ruled that FBAR penalties can be passed from the deceased to a surviving spouse, an estate executor, fiduciaries of an estate, or inheritors of an estate. In essence, understanding your potential FBAR filing requirements is critical to protect your foreign assets and avoid steep penalties.
Have Questions About What This All Means for You?
At ATKG we are committed to keeping you informed. Please contact your ATKG advisor to learn more about how the FBAR requirements affect you or email us at info@atkgcpa.com.
Ryan Fluegge is a tax professional with ATKG – having joined in August of 2019. That same year he graduated from Texas State University, where he earned a double major and received his bachelor’s degrees in Accounting and Finance. Ryan’s work ethic and dedication are especially impressive as he graduated Magna Cum Laude while managing a full-time job throughout college. After two degrees, Ryan says that attending graduate school is next on his to-do list.
