If you are a US citizen or tax resident, you may have a Foreign bank Account reporting obligation. There are individuals who don’t report their foreign financial accounts to evade taxes, but that is an exception and not the norm. For the vast majority of those who fail to report, the reason is that they were simply unaware of their reporting requirements.

Foreign Bank Account Reporting under the Bank Secrecy Act

Form FinCEN 114 (formerly Treasury Department Form 90-22.1) Report of Foreign Bank and Financial Accounts (FBAR) is a reporting requirement under the Bank Secrecy Act of 1970. While most of the provisions under the Bank Secrecy Act were created as requirements for foreign banks to comply with, the Fbar is an individual filing requirement. Under 31 CFR 1010.350 each person subject to the jurisdiction of the United States having an interest in, signature or other authority over, one or more bank, securities, or other financial accounts in a foreign country must file an FBAR if the aggregate value of such accounts at any point in a calendar year exceeds $10,000.

Who is Subject to the FBAR?

An FBAR is required to be filed by any person subject to the jurisdiction of the United States (“United States Person” or “USP”): A USP means a citizen of the U.S., a tax resident of the U.S., or an entity that was created, organized, or formed under the laws of the U.S. or its territories. A tax resident is someone who has met the substantial presence test or is a green card holder. A resident can also include a corporation, LLC, LLP, or other entity formed under the laws of the U.S.

What is the Threshold for Filing an FBAR?

If the aggregate value (total value) of all reportable accounts exceeds $10,000 at any point in the calendar year exceeds $10,000, all such accounts must be reported.

Example: Bob has 5 foreign bank accounts. The highest total value of all accounts was on July 1, 2016. On this date Bank A had $1,000, Bank B had $3,000, Bank C had $0, Bank D had $5,000, and Bank E had $2,000, resulting in a total value of $11,000. Therefore, Bob has an FBAR filing requirement with respect to all 5 of his foreign bank accounts.

What Types of Accounts are Reported on the FBAR?

There are two requirements for an account to be considered a reportable account on the FBAR.

(1) There must be a financial interest, signature authority, or other authority over the financial account.

A U.S. person has a financial interest in each account for which such person is the owner of record or has legal title, whether the account is maintained for his own benefit or for the benefit of others including non-U.S. persons.  Sometimes an individual may not be the legal account holder but may have an indirect financial interest in the account. Example: Bob sends $25,000 to his brother John in Canada to open up an investment account and deposit the money for him. John opens the account in his name, but the money clearly belongs to Bob. Bob has an indirect financial interest in that account and must report it on the FBAR. Any income earned from that account must also be reported on Bob’s U.S. income tax return.

A common scenario we’ve come across is where an overseas parent opens an account in a foreign country and includes their U.S. resident son or daughter as a legal account holder. This is common practice in some Asian countries as a will substitute. Such countries might not have a reliable probate system and the only way to ensure a seamless transfer of inheritance upon death is to include the future beneficiary on the account. This creates an FBAR filing requirement for their U.S. resident son or daughter. However, any income from these accounts may not need to be reported on the child’s tax returns. Unlike for FBAR reporting, for tax purposes there is a distinction made between equitable and legal ownership.

A person is considered to have signature authority over an account if the person can control the disposition of assets in the account by direct communication with the institution with whom the account is maintained.

(2) The foreign account must be a bank, securities, or other financial account. Below is a table of the types of financial accounts that are required to be reported on the FBAR.

Consequences of FBAR Non-Compliance

The U.S. has intergovernmental agreements (IGAs) with an ever growing number of foreign jurisdictions under the FATCA regime. IGAs require foreign taxing authorities to provide information about individuals that are believed to be U.S. persons and have financial accounts in their jurisdiction. Even in the absence of an IGA, foreign banks often voluntarily choose to report this information since banks that do not comply with FATCA forfeit their ability to do business with the U.S.

Foreign banks that are FATCA compliant will send a letter to any clients they believe have a U.S. nexus. Often known as a “FATCA letter”, this is the first step in the process of information sharing with the IRS. If the account holder chooses not to respond or the bank determines that the account holder is not compliant, this information will be eventually provided to the foreign taxing authority which will in turn be disclosed to the IRS. Once the IRS determines there has been an FBAR violation, the IRS examiner will issue either a FBAR warning letter (Letter 3800) or decide to assess a penalty. Whether the IRS examiner will issue a warning letter or assess a penalty will depend on the facts. Here’s an example provided in the IRM: “An individual failed to report the existence of five small foreign accounts with a combined balance of $20,000 for all five accounts, but properly reported the income from each account and made no attempt to conceal the existence of the accounts. The examiner must consider all the facts and circumstances of this case to determine if a warning letter is appropriate in this case or if it would be appropriate to determine civil FBAR penalties.”

FBAR Penalty Structure

The IRS imposes various levels of penalties for failure to file an FBAR, depending on the severity of the non-compliance.

Negligence

Under 31 USC 5321(a)(6)(A), a negligence penalty up to $500 may be assessed against a business for any negligent violation of the BSA, including FBAR violations. The simple negligence penalty applies only to businesses, not individuals. If any trade or business engages in a pattern of negligent violations of any provision (including the FBAR requirements)] of the BSA, a civil penalty of not more than $50,000 may be imposed. This is in addition to the simple negligence $500 penalty. The examiner is given discretion to determine the penalty amount up to the $50,000 ceiling.

Nonwillful FBAR Violations

Under 31 USC 5321(a)(5)(B), a penalty, not to exceed $10,000 per violation, may be imposed on any person who violates or causes any violation of the FBAR filing and recordkeeping requirements. The penalty should not be imposed if the violation was due to reasonable cause, and the person files any delinquent FBARs and properly reports the previously unreported account.

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