In today’s complex global economy, it is no longer uncommon for an individual or a company to have a financial account of some kind located outside the United States. But what some people don’t realize is that by keeping money in these accounts, they may be required to file a special report with FinCEN, the U.S. Treasury Department’s Financial Crimes and Enforcement Network. This filing, the Report of Foreign Banks and Financial Accounts, is commonly called the FBAR.
In recent years, there has been a dramatic increase in the IRS’s enforcement efforts in relation to unreported foreign accounts, including failure to file an FBAR. Part of the rationale behind this enforcement is to reduce and combat tax evasion, money laundering and other illegal activity. But it’s not only criminals who can run afoul of this law; regular, innocent account-holders may fail to file through negligence or ignorance, placing them in the sights of the law’s stiff penalties. Don’t let this happen to you or your organization. Below, we’ve answered some common questions concerning the FBAR in order to help you remain clean and above-board in your business dealings.
What Is the FBAR?
The Report of Foreign Banks and Financial Accounts, or FBAR, is a mandatory, annual report of all offshore accounts. These accounts might include a bank account held in an offshore bank, a brokerage account, a mutual fund, a trust or another type of foreign financial account that exceeds certain monetary thresholds. The law currently states that any “U.S. person” (U.S. Citizen, green card holder or resident alien) who has a financial interest in, or signature or other authority over, foreign financial accounts that have an aggregate value exceeding $10,000 at any time during the calendar year, must file an FBAR with the Department of the Treasury. In addition to individuals, the term “U.S. person” also applies to a domestic entity such as a corporation, partnership, trust or limited liability company, regardless of whether the entity has elected to be disregarded for federal income tax purposes.
What Is “Financial Interest In”?
There are multiple ways to have a legal “financial interest” in an account, trust or fund. In addition to directly owning the foreign account, a U.S. person is considered to have financial interest if they meet any of the following conditions:
- A corporation in which the U.S. person directly or indirectly owns 50% or more of the voting power or total value of the shares.
- A partnership in which the U.S. person directly or indirectly owns 50% or more of the profits or capital.
- Any other entity in which the U.S. person directly or indirectly owns 50% or more of the voting power, total value of the equity interest or assets, or interest in profits.
What Is “Signature Authority”?
For years, the concept of signature authority was fraught with ambiguity, and none of the regulations surrounding FBAR provided a precise definition of it. However, since 2011, the official definition of signature authority, as it pertains to FBAR, is any person who has authority “(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.”
It is important to understand that officers and employees of companies might also be included within this definition, and while they may delegate the filing of the report to a third party, they remain personally responsible for a delinquent filing.
Are There Any Exemptions for Filing FBAR?
There are a limited number of exemptions for filing the FBAR for U.S. persons with signing authority of funds provided that they do NOT also have a financial interest in the same fund. Those exemptions include:
- An officer or employee of a financial institution registered with and examined by the SEC or the Commodity Futures Trading Commission;
- An officer or employee of an authorized service provider does not need to report that he or she has signing authority over a financial account owned or maintained by an investment company registered with the SEC;
- An officer or employee of an entity with a class of equity securities listed on any U.S. national securities exchange; and
- An officer or employee of an entity with a class of equity securities registered under Section 12(g) of the Securities Exchange Act.
What Are the Consequences of Noncompliance?
Failing to file a FBAR could lead to serious legal consequences. These penalties are enforced in a tiered fashion, depending upon the seriousness of the offense.
For non-willful violation (for example, good faith inadvertence, mistaken filing or negligence), the penalties can range up to $10,000. For situations deemed to be intentional and willful violation, the penalty could reach as high as $100,000 or half of the account in question, whichever is greater.
How Do I File an FBAR?
The FBAR must be filed electronically, either through FinCIN’s BSA E-filing System, or in coordination with a tax preparation service that has the ability to file for you. Typically, each person must file a separate report. In rare instances, a joint account can be filed, such as when spouses own an account together and neither has a second, separate account.
When Is the FBAR Filing Due?
In years past, the FBAR filing due date has fallen on or around June 30, well past the deadline for most other tax filings. However, as announced in December 2016, the annual filing date has been changed so that it is more in line with the IRS’s federal income tax filing season. This change was put into effect by the Veterans Health Care Choice Improvement Act of 2015.
So, the due date for filing an FBAR for foreign financial accounts in 2018 was technically April 17, 2018. That said, filers who failed to complete their appropriate FBAR filings by that date are able to take advantage of an automatic extension, which extends your time up to October 15, 2018. Specific requests for this extension are not required.
The legislation surrounding foreign accounts can be easy to misunderstand. Options are available for those who may have inadvertently failed to file FBAR reports in the past that can reduce any incurred penalties.
If you are uncertain about any accounts belonging to you or your organization, consult a licensed tax professional for help.