The FBAR (Foreign Bank and Financial Account Reporting)

Everything to Know About FBAR Foreign Account Reporting

FBAR (Foreign Bank and Financial Account) 

The US Government requires US Taxpayers who own foreign assets and accounts to disclose this foreign account information on FinCEN Form 114 — otherwise known as the FBAR — in addition to filing a US Tax Return. FBAR refers to the Report of Foreign Bank and Financial Accounts, which is filed by US Persons on FinCEN Form 114 and enforced by the Internal Revenue Service in accordance with Money and Finance (not Internal Revenue Code) section 5314 et seq. Unlike other international information reporting forms, the FBAR is not a Tax Form. Still, the IRS is tasked with assessing and enforcing FBAR Penalties — which has been a US Government compliance priority for several years now. Foreign Bank and Financial Account violations may result in Civil and/or Criminal FBAR penalties — although criminal penalties are rare. Usually, the US Person will get hit with civil penalties, which can range extensively. To reduce or avoid these penalties the IRS has developed several amnesty programs, collectively referred to as offshore voluntary disclosure. We have prepared a summary explaining the basics of the FBAR, who has to file, and when.

Who Is a US Person for FBAR Purposes?

A US person is more than just an individual. Rather, a “US person” refers to a citizen or resident of the United States, as well as certain entities that were created under US law. Some examples include a corporation, partnership, trust, limited liability company, and even an estate. 

What Is a Financial Account?

A financial account is more than just a bank account. Rather, a foreign financial account can include several different items that are reportable, such as checking and savings accounts; securities accounts; commodity futures or options accounts; insurance policies; mutual or other pooled funds; and more. While (at the time of this article) cryptocurrency is not required to be reported unless the account holds other types of currencies in addition to cryptocurrency, Notice 2020–2 shows that the US government has every intention of requiring virtual currency as a reportable account under 31 CFR 1010.350.

Determining Maximum Account Value for FBAR

The reporting requirement is that those who have to file an FBAR must report the maximum account value throughout the year. Generally, this is done by translating or exchanging foreign money into US dollars using the exchange rate on the last day of the year – noting that the IRS recommends using the Treasury Department exchange rates, which can be found here.

What Is a Financial Interest?

There are two main categories for reporting foreign accounts on the FBAR: (1) accounts in which a person has a financial interest and (2) accounts in which a person has no financial interest but rather has a form of signature authority. The publication sets forth various examples of when a person is considered to have a financial interest and it is clear from the examples that there are many situations that would require a person to report the account. For example, if an account is for a Domestic Corporation, the reporting can get more complicated. Those with US entities should consider the different reporting requirements and what the IRS deems a financial interest.

Understanding Jointly Held Account FBAR Reporting

One common misunderstanding is when people report joint accounts, they only report their interest in the joint account. For example, if a person is a third owner of an account with $150,000 in it, they only report $50,000, but that is incorrect. IRS Publication 5569 makes it clear that if a person has an interest in a joint account, then the entire value of the account (and not just the portion of the account they own) is reportable.

FBAR Exceptions to Filing

There are some exceptions to having to file the FBAR, but they are far and few between, and more often than not, a person will have to file an FBAR. One common exception is when a person owns a US retirement account in which the retirement account may have some foreign holdings that would otherwise qualify for FBAR reporting. Since they are held within a US IRA or tax-qualified retirement plan (and not individually), reporting may be avoided in these situations.

Due Date for FBAR Filing

The FBAR is technically due in April when taxes are due. Previously, the form was due on June 30. While April is the due date for filing the FBAR, the form is currently on automatic extension and has been for the past few years. By being an automatic extension, that means that the taxpayer has until October without having to file any additional extension form such as Forms 4868 or 7004.

FBAR Penalties Explained

2023 will go down in the tax record books as a banner year for taxpayers across the globe who have unreported foreign accounts and are facing FBAR penalties. That is because the Supreme Court issued a ruling in February of 2023, limiting civil non-willful FBAR penalties — the most common type of foreign bank account penalty — to a $10,000 per year penalty. Prior to this ruling, the IRS seemingly had carte blanche to issue penalties upwards of $10,000 per account, per year— typically not to exceed the 50% willfulness threshold (the $10,000 adjusts for inflation each year). As a result of this new Supreme Court ruling, even if a taxpayer failed to report millions of dollars in their foreign accounts, as long as they are non-willful, the IRS will be limited to issuing a $10,000 per year penalty if they were found to be non-willful.

Court Ruling is Limited to Civil Non-Willful FBAR Penalties

It is important to take the Court’s ruling in stride, specifically as to the fact that the IRS still has the power to issue willful penalties, which can reach 50% maximum value of the highest value of the unreported accounts each year. While there is also the potential of criminal FBAR penalties, don’t get too overwhelmed by all the nonsense and fearmongering you will undoubtedly find online about going to jail or prison for an FBAR violation. In general, criminal FBAR penalties are rare – and they typically only rear their ugly head in situations in which other crimes have been committed, such as money laundering, structuring, smurfing, etc. Let’s take a look at what the FBAR penalties may look like in 2023 and beyond.

Non-Willful Civil FBAR Penalties

According to the court’s new ruling, non-willful Civil FBAR penalties are limited to a ‘per form, per year’ penalty. In other words, even if a Taxpayer failed to report 22 foreign financial accounts in a single year on the FBAR, the penalty is limited to one penalty per year — because it is based on the form being filed and not the number of accounts.

Willful Civil FBAR Penalties

The penalties for willful FBAR penalties can be substantial. The IRS has the right to issue penalties upwards of 50% of the maximum aggregate value of unreported foreign accounts per year, for six (6) years. In recent years, the total FBAR penalty for the entire compliance period has generally been limited to a 100% maximum value for the non-compliance period — noting that it previously used to be a 300% maximum, with 300% representing the fact that it is a 50% penalty per year — and the statute of limitation is for six years.

Willfulness is not the same as ‘Intent’

Taxpayers do not have to have acted intentionally in order to become subject to willful FBAR penalties. That is because there are two lower levels of behavior that qualify as willful: Reckless Disregard and Willful Blindness. Unfortunately, there is no hard and fast rule as to how a person is deemed to have acted with reckless disregard or willful blindness. The IRS’s findings of willfulness are based on the application of a ‘totality of the circumstance’ approach for each taxpayer. Willful FBAR penalties are not impacted by the new ruling.

Criminal FBAR Penalties

Taxpayers can also become subject to criminal penalties if they are deemed to be criminally willful. Like any criminal case, the Taxpayer hast to be found guilty by a jury of his peers and the Government must show the crime was committed ‘beyond a reasonable doubt.’ In general, criminal FBAR liability is rare and limited in situations in which there are various other issues at play such as hiding offshore money, tax evasion, structuring, etc.

Other Foreign Account Reporting Forms to File

While the FBAR is the most common of the international reporting forms (due to the fact that it encompasses many different types of categories of accounts), it is just one of several international reporting forms that may be required. Oftentimes, taxpayers will have to file several forms in order to comply with the requirements for foreign financial accounts and other assets, such as FATCA Form 8938; Foreign Gifts and Trusts (Form 3520/3520-A); and Passive Foreign Investment Companies (Form 8621).

FBAR Filing Examples

While FBAR reporting can get complicated (especially if the Taxpayer is out of IRS foreign account compliance), once the Taxpayer gets the hang of it, it just becomes another over-burdensome form the Taxpayer must file each year in addition to their regular tax return (the FBAR is not part of the tax return filing). Let’s go through some common examples of FBAR reporting.

*For all examples, please note that the Taxpayers are U.S. persons for tax purposes who have not made any treaty elections to be treated as a Non-Resident Alien (NRA). Also, these examples are for illustrative purposes only and Taxpayers should consult with a Board-Certified Tax Law Specialist if they have specific questions about their reporting requirements and not rely on this article for legal advice.

Bank Accounts

Many situations will warrant the Taxpayer to have to file the FBAR when they are the owner of a bank account:

• • • Example: David has 15 foreign accounts for a total value of $180,000. 12 of the accounts are active and three of the accounts are dormant, with less than a few dollars in each of them. All 15 accounts are reportable on the FBAR.

    • Example: Dean has nine accounts, but they are all located at the same Foreign Financial Institution. Even though all nine accounts are located at the same foreign financial institution, Dean must report all nine accounts on his FBAR.

    • Example: Deborah had four foreign accounts, but she recently closed all of them in the current year. Even though Deborah closed the accounts in the current year, she still must report all the accounts on the FBAR because at one point during the year the total annual aggregate value of the accounts was $600,000.

    • Example: Dianne has seven accounts, but it is the same $200,000 transferred into a new different account every six to eight weeks (in order to take advantage of increasing interest rates). Even though it is the same $200,000 that was transferred to different accounts throughout the year, Dianne must report all seven accounts on the FBAR. That is because the FBAR is not used to report the total amount of money the Taxpayer has, but rather to report the maximum value of each of the different accounts throughout the year.

    • Example: Dustin has 31 accounts of which he is the owner of and has no signature authority accounts. Dustin must identify on the FBAR that he has more than 25 accounts and prepare the supplemental FBAR form for his records.

Pooled Funds (Account vs No Account)

Pooled funds such as foreign mutual funds and ETFs are reportable for FBAR purposes, but the extent of the reporting will be determined by how those funds are being held:

• • • Example: Scott has 27 different mutual funds, but they are all located in a single account under one account number. For purposes of the FBAR, Scott will report the main account number and the total value of all the assets under that account — but for purposes of IRS Form 8621, Scott will report each fund separately.

    • Example: Steven has 13 different foreign ETFs, but they are not contained in a single account. Instead, he owns each fund individually. For FBAR purposes, Scott will list out each fund separately.

Foreign Life Insurance Policies

Some foreign life insurance policies are reportable as well — depending on whether they have a cash or surrender value or not:

• • • Example: Peter is the owner of a life insurance policy that has a face value of $800,000 and a current cash/surrender value of $250,000. Peter will report the surrender/cash value of the policy on the FBAR.

    • Example: Penelope is the owner of an insurance policy that has no cash or surrender value. Generally, this type of policy is not reportable for the FBAR, although exceptions and exclusions may apply.

    • Example: Parker is listed as a beneficiary on an insurance policy which he does not own and does not have any control or financial interest in. Parker typically is not required to report this type of insurance policy because he is not the owner.

Foreign Pension Plans

A few years back the IRS published some ambiguous information about the requirement to report foreign pensions on the FBAR. In short, foreign pension plans are generally reportable for FBAR (and FATCA):

• • • Example: Brian has a foreign pension plan through his prior employer when he lived abroad. He has not made any contributions to the plan in several years (since becoming a U.S. person) and has not yet received any distributions from the pension plan either. The pension plan is still reportable on the FBAR.

    • Example: Brenda has a personal foreign pension plan that she purchased when she was living overseas. Over time, the value of the pension plan grew significantly (although Brenda has not made any contributions or received any distribution since becoming a U.S. person). Brenda is also required to report the pension plan on the FBAR.

Signature Authority Accounts

Unlike Form 8938 (FATCA), for FBAR reporting purposes, a Taxpayer must include accounts even if they do not have a financial interest in the account but only have signature authority over the account:

• • • Example: Charlie was listed as a signatory on a bank account that his grandma owns in a foreign country. He does not have any ownership over the account and has not made any contributions to the account. Charlie is still required to report the account on his FBAR.

    • Example: Chris works for a company that operates in various foreign countries and the company listed Chris as a signatory on these accounts so that he can issue checks to employees and vendors worldwide. Even though Chris did not open the account and does not have any ownership of the funds in the account, he is still required to report the account on the FBAR.

    • Example: Caroline recently started her own business and opened a few foreign accounts under her business — and listed herself as a signatory. She does not own the accounts herself and the contributions to the accounts were made directly by the business. Since Caroline is a signatory on these accounts, she is required to report the accounts on the FBAR.

Social Security

Accounts in foreign countries that are Social Security equivalent are generally exempt from FBAR reporting.

The Tip of the Iceberg

The goal of this article is to help clarify some of the basics of FBAR reporting. Reporting foreign assets to the U.S. tax authorities can be very complicated, especially when it involves additional items such as foreign life insurance policies, foreign corporations, foreign partnerships, and transactions between U.S. persons and foreign companies. Taxpayers should try to stay in compliance if they are already in compliance or should consider getting into compliance if they have not properly filed the necessary reporting forms if for no other reason than the fact that the IRS has made offshore compliance a key enforcement priority and has been issuing fines and penalties for non-compliance. 

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.  *This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.  Contact our firm today for assistance.