US persons with financial accounts maintained outside the US must report these accounts to the US Department of the Treasury annually if the balance exceeds a certain level during the year. Due to continuing media attention of efforts to improve compliance in this area, individuals are becoming more aware of the filing requirements.
History and purpose
The foreign bank account reporting rules are a component of anti-money laundering laws that seek to fight financial crime, including terrorist financing and money laundering. Beginning with the Bank Secrecy Act in 1970, a series of record keeping and reporting requirements have been put in place.
Examples of common measures are the requirement for banks to report cash transactions over $10,000 using the Currency Transaction Report, as well as the requirement for US persons to report their foreign account information if the aggregate value of all accounts exceeds $10,000 at any time during the calendar year. For US persons, the information is reported using the Report of Foreign Bank and Financial Accounts (FinCEN Form 114, formerly Form TDF 90-22.1), often referred to as the FBAR.
New for 2013
Effective October 1, 2013, FinCEN Form 114 must be filed electronically via the US Department of the Treasury’s Financial Crimes Enforcement Network website at its Bank Secrecy Act (BSA) E-Filing System. If the US person uses a paid preparer to e-file on their behalf, Form 114a, Record of Authorization to Electronically File FBARs, must be complete before their FBAR is filed online and the paid preparer must maintain the form in their records in case it is requested by FinCEN. Registration is required through the BSA E-Filing System. The US person can complete the registration if they file the form, or tax practitioners can register and e-file on behalf of their clients.
Who must file?
Any “US person” is subject to the foreign account reporting rules. This includes US citizens and residents, and legal entities such as corporations, partnerships, and trusts created under US laws.
It does not include nonresident aliens who are not US residents during the year, as determined - for income tax purposes - under Section 7701. Non US individuals who must file a tax return as a US resident - even if they are not US citizens - may be surprised by these rules.
What is a Foreign Bank Account?
A foreign bank account includes the typical accounts that may be held by an international assignee: a savings or checking account maintained with a branch of a financial institution (such as a bank) that is physically located outside the US.
However, the definition is broader than this, and includes securities or brokerage accounts, whole life insurance, foreign retirement accounts (not held with a government), and annuities with a cash value maintained outside the US. Recent guidance suggests that Bitcoin or other virtual currency accounts should be reported on the FBAR if the account is held in a foreign exchange.
Additionally, the reporting rules apply to US persons who have either a financial interest in or signature authority over, a foreign account. This affects officers or employees who have the ability to control the disposition of assets in a company’s foreign account by direct communication (whether in writing or otherwise) to the foreign financial institution. For example, the treasurer of a company may have signature authority over (but no financial interest in) his employer’s foreign account, or the foreign account of a subsidiary of his employer.
The rules do not provide a blanket exemption for US persons with an interest in a foreign pension fund. However, if the US person owns directly, or indirectly, less than 50% of the voting power, total value of the equity interest or assets, or interest in profits, of the foreign pension fund, then the reporting requirements do not apply. The specifics are beyond the scope of this newsletter; however, US persons are encouraged to review their filing responsibilities.
What information must be reported?
The account information required to be reported includes the maximum value of the account during the year, the account number, and the name and address of the institution. The form must be electronically signed by the account owner. Special rules may apply if the account is jointly owned.
There are separate reporting sections for accounts owned separately, accounts owned jointly, accounts where the filer has signature authority but no financial interest in the account, and accounts where the filer is filing a consolidated report.
The revised form now includes a place where the reason for late filing needs to be added and includes a section for paid preparer information. As mentioned above, paper filings are no longer accepted.
Isn’t this part of my Form 1040?
People often assume the foreign bank account reporting process is part of their US individual income tax return preparation, but it is a separate report.
The FBAR has a different due date. Moreover, an extension to file your 1040 does not extend the due date for your FBAR - there is no extension of time to file your FBAR. The due date is June 30 of the following year (i.e. 2013 FBAR is due June 30th, 2014). The FBAR must be received by the Treasury Department on or before June 30.
However, there is a connection to Form 1040. Earnings from foreign accounts must be reported and taxed on Form 1040. In addition, the taxpayer is required to disclose on Schedule B whether the taxpayer owns any foreign bank accounts and may be required to report the accounts on Form 8938, Statement of Specified Foreign Financial Assets.
Current penalties for noncompliance with the FBAR rules are severe. Considering only the FBAR non-reporting penalties (not income tax related penalties):
- They can include a civil penalty as high as the greater of $100,000 or 50% of the total balance of the foreign account per violation.
- Even non-willful violations not due to reasonable cause are subject to a $10,000 penalty per violation.
- Not only that, but criminal charges related to tax evasion, filing a false return, and failure to file an income tax return can include prison and fines up to $250,000.
Clearly, the penalty structure is such that individuals should take very seriously their obligation to file FBAR forms as well as to pay the tax associated with balances and income in the accounts.
The IRS has established an amnesty program to permit taxpayers with foreign bank accounts (and unpaid taxes) to voluntarily disclose unfiled FBARs from prior years. On January 9, 2012, the IRS introduced the third amnesty program, and reflects the growing attention IRS is paying to tax evasion through the use of foreign accounts.
The IRS has made it clear that taxpayers who reported and paid tax on all their taxable income for prior years, but did not file FBARs, should simply file the delinquent FBAR according to the form instructions, and attach a statement explaining why the reports are filed late. It is not intended that these taxpayers participate in the amnesty program.
FinCen issued Notice 2013-1 that extends the FBAR filing deadline until June 30, 2015 for the following individuals:
- An employee or officer of a covered entity who has signature or other authority over and no financial interest in a foreign financial account of another entity more than 50 percent owned, directly or indirectly, by the entity (a “controlled person”).
- An employee or officer of a controlled person of a covered entity who has signature or other authority over and no financial interest in a foreign financial account of the entity or another controlled person of the entity.
This extension applies to individuals with signature authority over accounts held during the 2013 calendar year, as well as all reporting deadlines previously extended by the earlier notices. Notice 2013-1 is titled FBAR Filing Requirement-Extended Filing Date Related to Notice 2012-2, dated December 17, 2013, and can be found on the FinCEN website.
We recommend that you contact your tax or legal advisor should you have any questions regarding the FBAR or amnesty program.
If you have any questions please feel free to contact us at email@example.com
The information provided is for general guidance only, and should not be utilized in lieu of obtaining professional advice.
Author: Sajjad Abadin, Manager
Sajjad began his career with GTN in 2014 and currently serves as Senior Manager in GTN’s Great Lakes region. He has nearly 15 years of experience in expatriate and foreign national tax preparation and consulting. He oversees multiple companies’ mobility tax programs as well as many independent assignees. Clients rely on Sajjad to expand their understanding of complex mobility tax issues, and they put trust in his ability to coordinate and manage the intricacies of their specific mobility programs. firstname.lastname@example.org | +1.708.887.0275