Shawn Siwek, Senior Manager
GTN West Central
Phone: +1.763.252.0643 | Email: email@example.com
US persons with financial accounts maintained outside the US must report these accounts to the US Department of the Treasury annually (on or before June 30) if the balance exceeds a certain level during the year. The accounts are reported annually on Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Due to continuing media attention of efforts to improve compliance in this area, individuals are becoming more aware of the filing requirements.
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.
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 accounts, 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. In this situation, the Treasurer would be subject to the FBAR filing requirements.
For those US persons with an interest in a foreign pension fund, the filing rules do not provide a blanket exemption. 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 can get very complex and are beyond the scope of this newsletter. US persons with such holdings are encouraged to review their filing responsibilities with their tax or legal advisor.
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 previously mentioned, the revised form needs to be file electronically; paper filings are no longer accepted.
Isn’t this part of the US 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.
Though the filing of the US Form 1040 does not satisfy the filing reporting requirements for foreign bank accounts, there is a connection to US Form 1040. Earnings from foreign accounts must be reported and taxed on US Form 1040. In addition, the taxpayer is required to disclose on Schedule B whether they own any foreign bank accounts and may be required to report the accounts on Form 8938, Statement of Specified Foreign Financial Assets.
The FBAR has a different due date. Moreover, an extension to file a US Form 1040 does not extend the due date for the FBAR as there is no extension of time to file the FBAR. (see below for the only exception to this rule). The due date is June 30 of the following year (i.e., 2015 FBAR is due June 30th, 2016). Please note the FBAR must be received by the Treasury Department on or before June 30 and must be e-filed using the BSA E-Filing System.
Important Change to Note: The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 changes the standard FBAR due date to April 15 beginning with the 2016 calendar year FBAR reports which are due in 2017. In addition, the law provides an extension, for the first time, for filing the FBAR for a maximum of six months (i.e., no later than October 15). The IRS will be providing further guidance on the procedures surrounding this extension.
Extended Filing Deadline for Certain Individuals
FinCEN issued Notice 2015-1 that extends the FBAR filing deadline for calendar years 2010 through 2015 until April 15, 2017 for the following certain 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 2015 calendar year, as well as all reporting deadlines previously extended by the earlier notices (i.e., for calendar years 2010 through 2014). Notice 2015-1 is titled FBAR Filing Requirement-Extended Filing Date Related to Notice 2014-1, dated December 8, 2015, and can be found on the FinCEN website.
Important - The extension does not apply to foreign financial accounts in which these individuals have an actual financial interest or to personal accounts over which they have signature authority. Thus, an FBAR filing may be required to report calendar year 2015 accounts by June 30, 2016. In these situations, an amended FBAR would need to be filed to report any corporate accounts not originally required to be reported because of the FinCEN extension.
GTN has developed a cost effective process for assisting companies and their executives with the filing of FBARs affected by these notices. Please contact Shawn Siwek at firstname.lastname@example.org or your GTN team leader to learn more about this service.
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 US persons should take their obligation to file FBAR forms very seriously 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 which reflects the growing attention the 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. For information on the US Streamlined Compliance filing procedures please see our March 2016 newsletter.
We recommend you contact your tax or legal advisor should you have any questions regarding the FBAR or amnesty program.
The information provided in this newsletter is for general guidance only and should not be utilized in lieu of obtaining professional tax and/or legal advice.