The Bank Secrecy Act (BSA) gives the Department of Treasury the authority to collect information from United States persons, including expats, who have financial interests in or signature authority over financial accounts maintained with financial institutions located outside of the United States.
The BSA requires that a FinCEN Report 114, Report of Foreign Bank and Financial Accounts (FBAR), be filed if the maximum values of the foreign financial accounts exceed $10,000 in the aggregate at any time during the calendar year.
Alan, a U.S. citizen, moved abroad in 2015 and opened a current account at a local bank. During the same year, he opened a savings account at a separate local bank. He first funded the current account with $5,000 and then funded the savings account with $6,000. During he year, Alan decides to go a vacation and spends $5,000 from his savings account such that on December 31, 2015, the remaining balance in his savings account is $1,000 while his current account has a balance of $3,000. Although Alan did not have any single account with $10,000 in value and although the aggregate account value of his two accounts did not exceed $10,000 at year-end, Alan would be required to file a 2015 FBAR, because during the 2015 year, the aggregate maximum account value of Alan’s two accounts was more than $10,000 (i.e., $11,000).
Filing the FBAR and Due Date
The FBAR form (FinCEN Form 114) must be filed electronically using the BSA E-Filing System maintained by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”).
For tax years 2016 and onwards, the FBAR due date is April 15th, with a maximum extension of 6 months.
Foreign Financial Account
Financial accounts include the following types of accounts:
- Bank accounts such as savings accounts, checking accounts, and time deposits
- Securities accounts such as brokerage accounts and securities derivatives or other financial instruments accounts
- Insurance policies with a cash value (such as a whole life insurance policy)
- Mutual funds or similar pooled funds (i.e., a fund that is available to the general public with a regular net asset value determination and regular redemptions)
Typically, a financial account that is maintained with a bank or financial institution located outside of the United States is a foreign financial account.
If two persons jointly maintain a foreign financial account, or if several persons each own a partial interest in an account, then each U.S. person has a financial interest in that account and each person must report the entire value of the account on an FBAR (exceptions may apply in the case of a married couple).
A non-willful failure to report foreign bank accounts can result in a penalty of up to $10,000 per account per year. The IRS has recently stated that these penalties represent maximum amounts and lower penalties may be appropriate depending on the circumstances.
A willful failure to file may be subject to civil penalties equal to the greater of $100,000 or 50% of the balance in each unreported account. In addition, criminal penalties of up to $250,000 or 5 years in jail (or both) may apply in the case of willful conduct.
If you have failed to file past FBARs, a number of options may be available to you.
For instance, a taxpayer that is delinquent with their tax return and FBAR filings can come into compliance in both respects using the Offshore Voluntary Disclosure Program (“OVDP”) or Streamlined Procedures, assuming he or she qualifies for these programs.
Additionally, a taxpayer that has been compliant with his tax returns but not with his FBAR filings may qualify for the Delinquent FBAR Submission Procedures (“DFSP”), which allows taxpayers to submit missing FBARs without being subject to penalties. Under this program, one is required to submit missing FBARs going back six years while including a brief statement explaining why the FBARs were filed late.
Financial account reporting can be complex and often requires the assistance of an experienced tax professional to get it right. Furthermore, delinquent FBAR penalties can be severe, and the IRS has the right to end its amnesty programs at any time.
If you need help with either your current FBAR filings or past year filings, our professionals can surely help. The FBAR rules include several nuances that require careful attention and analysis. Click here to contact us for help with your FBARs.