Who Has To Report Foreign Bank Accounts to the IRS?

What are Foreign Bank Accounts?

Who Has To Report Foreign Bank Accounts to the IRS?

Two (2) of the most common Questions we receive are:

– What are Foreign Bank Accounts?

– Who Has to Report Foreign Bank Accounts?

The following is a summary about Foreign Bank Account, followed by a Summary of Basic International Reporting Requirements and a Summary of Offshore Disclosure options.

While Foreign Bank Accounts are simply Bank Accounts that are located in a foreign country – the IRS and U.S. Government definition can get much more complex and convoluted.

Moreover, if you have unreported foreign bank accounts — which means you have foreign bank accounts which you did not properly report to the Internal Revenue Service (IRS) or Department of Treasury (DOT), you may be subject to significant fines and penalties.

And, if the US government believes you intentionally failed to disclose the account information, you could be subject to a criminal investigation.

The following is intended as a brief guide to help you understand foreign bank accounts, why they need to be reported and what happens when you have unreported foreign bank accounts.

Who has to Report Their Foreign Bank Accounts?

Under federal law, US account holders of foreign accounts are required to report their account information in a number of different circumstances. The most common circumstance in which a person must report a foreign bank account is when they meet the threshold requirement for filing an FBAR.

An FBAR is a Report of Foreign Bank and Financial Account form. The FBAR form has been around since the 1970s, but with the recent implementation of FATCA (Foreign Account Tax Compliance Act), the IRS has renewed interest in enforcing foreign bank account compliance.

A person must file an annual FBAR statement in any year in which they have ownership, interest or signature authority over foreign bank accounts, that at any time during the year have an annual aggregate total that exceeds $10,000 on any day of the year. It is very important to understand that it does not matter if one account is worth $500,000 or there are 11 accounts each worth $1500. Once the annual aggregate total exceeds $10,000 on any given day, you are required to report all of the accounts.

The other very common form required for individuals who have foreign bank accounts is called a FATCA Form 8938. The threshold requirements for having to file this form is higher than for the FBAR and also has different requirements. It is very common for individuals who have to file an FBAR to also have to file a FATCA Form 8938

What is a Foreign Bank Account?

One of the most common questions we receive at Golding & Golding (especially from our foreign residents) is the following: “Why is it considered a foreign account if I’m a resident of the country the account is located in?” There is a very important nuance that you must consider when analyzing an account as a foreign account. Since we prefer to use examples, we will provide you an example of a recent scenario we had (changing the names)”

David was a client who was steadfast in his position that he was non-willful in reporting his foreign accounts. The only potential issue was that David reported accounts from one foreign country, but not the other.  We asked David how he could not know he was required to report accounts in both Japan and Switzerland (the only reported the Swiss accounts).

His response was simple: I live in Japan full-time. In fact, I only leave Japan for less than two weeks every year. Why would the accounts that I have in Japan be considered foreign accounts, when I live in Japan?

Here is the clarification: David is a Citizen of the United States. As such, David has an ongoing requirement to file US tax returns as well as FBARs (amongst other reporting forms) each year to report his foreign bank accounts. Just because David is a Resident of Japan does not eliminate his US citizenship. As such, from a US tax reporting perspective, David’s Japanese accounts are located outside of the United States. Therefore, since the accounts are foreign insofar as they are not located within the United States they are required to be reported as foreign accounts.

*When it comes to reporting foreign accounts, people are not limited to “Bank” accounts. Any qualifying foreign financial account must be reported, but that is beyond the scope of this particular article.

**If you have any type of unreported for an account such as a bank account, retirement account, investment account, insurance policy, mutual fund, trust and/or capital gain, interest income, dividend, or any other income you should get into compliance before you are caught off-guard by the IRS, DOJ or DOT — and subject to extremely unfair fines and penalties.

A Bank Account in which the Money is Not Mine

If you have a foreign bank account which is not under your name but in which you have money in the account, then technically this is considered a foreign bank account which would need to be reported. The key term is that you have your own money in the foreign bank account, and even if your name is not on the account, the money is still yours.

A Bank Account in which I Only have Signature Authority

This is very common for spouses, children of elderly parents, and employees. In any of the aforementioned situations, the signatory may not have any interest in the money, but he or she may have signature authority over the account. In this type of situation, the account is still considered a foreign bank account and would have to be reported.

Who Has to Report a Foreign Bank Account?

Assuming for purposes of this article (exemptions and exceptions always apply) that any account in a foreign bank or bank outside of the United States is considered a foreign bank account. The next issue is who has to report the foreign bank account?

The following is a list (not exhaustive) of the usual cast of characters of individuals and businesses required to report foreign accounts:

• A US Citizen has to report foreign bank accounts (no matter where he or she resides)
• A US Legal Permanent Resident has to report foreign bank accounts (no matter where he or she resides)
• A non-permanent resident who meets the Substantial Presence Test
• A former US Legal Permanent Resident who is considered a covered expatriate may have an ongoing requirement.
• An Expat who resides overseas, but did not formally renounce US citizenship
• A Foreign business with US ownership and foreign bank accounts
• An employee of a company that has signature authority over for the foreign accounts
• A US owner of a foreign trust that has bank accounts under its name
• A US owner of a Passive Foreign Investment Company (PFIC) that has bank accounts under its name
• A US owner of a Controlled Foreign Corporation (CFC) that has bank accounts under its name

What if a 1040 is Required (I didn’t Earn Enough Income)?

This is where it begins to get very complex. A person who is otherwise required to file a US Tax Return is not required to file a tax return unless they meet the minimum income threshold requirements for filing a tax return. Therefore, if a person would otherwise be required to file a form 8938 or schedule B, because they meet the threshold requirements for having foreign bank accounts, but are not required to file a tax return (because they did not earn sufficient income to have to do so) they do not need to file tax return simply to file the Schedule B or 8938.

It Gets More Complicated…

The same cannot be said of the FBAR. In other words, even if you have no foreign income or US income and therefore no requirement to file US tax return, if you meet the FBAR threshold requirements, you are still required to file the FBAR, even if you are not required to file a tax return because you do not earn enough income to have to file it.

And Even More Complicated…

Many forms are filed alongside a tax return, solely because the dates coincide – but that does not mean a person can avoid reporting these other forms (even when they do not have to file a tax return) because they did meet the income requirements for having to file a U.S. Tax Return. We understand that was a mouthful; in other words, if you have a requirement to file forms such as an 8621 or 3520, or 3520-A, then you are still required to file these forms even if you do not have to file a tax return; the confusion lies in the fact that these forms are generally filed at the same time of the Tax Return.

The reason this is important is because by filing these other forms (such as a 3520 or 8621) it still puts you “on the board” with the IRS. Therefore it is important that if you are required to file these forms – even if you did not have sufficient income to otherwise have to file a tax return – you should be sure to still file your FBARs if you meet the minimum threshold requirement for filing an FBAR.

**Under almost any circumstance, a Passive Foreign Investment Company (Form 8621) or Foreign Trust (3520-A) will have have foreign bank accounts associated with it, and therefore is important to ensure that you filed the FBAR as well.