Navigating the world of international finance can be a complex task, especially when understanding the requirements and compliance issues related to the Foreign Bank Account Report (FBAR), also known as FinCEN Form 114. This guide aims to comprehensively understand FBAR, its requirements, and how to ensure compliance.
What is the FBAR?
The U.S. government requires individuals to file a document called the Foreign Bank Account Report (FBAR) with the Financial Crimes Enforcement Network (FinCEN). It is designed to ensure that foreign assets and income are correctly reported, helping the Department of Treasury track the activities of U.S. citizens, residents, and businesses and ensure that foreign income is accurately taxed in the United States.
Who Must File an FBAR?
A U.S. person, which includes citizens, residents, corporations, trusts, partnerships, limited liability companies, and estates, must file an FBAR under certain circumstances. This situation occurs when a person in the US has a financial stake in or control over a financial account located outside of the country, and the combined worth of all the foreign accounts is over $10,000 (in US dollars) at any point during the year.
It’s important to note that the foreign financial account does not need to generate income or taxable income for the account to trigger the need to file the FBAR. If the balance of all foreign financial accounts exceeds the $10,000 threshold, each foreign account or asset must be reported, regardless of whether you received income from the foreign account and no matter how small or low the account’s value may be.
FBAR Compliance and Filing
Ensuring compliance with FBAR filing requirements is crucial. The FBAR report must be submitted annually by April 15th for the previous year. In case you miss the due date, you can get an extension until October 15th without having to make a request for it. There’s no need to file for an extension separately for the FBAR.
The FBAR is not filed with your individual tax return. Instead, you file the FBAR electronically through FinCEN’s E-filing system. You may be able to paper file the FBAR, but to do so, you must receive an exemption to E-filing from FinCEN. You are allowed to have a third-party file your FBAR on your behalf.
To properly file your FBAR, you will need the following information:
- The taxpayer’s name, address, date of birth (if an individual), social security or employer identification number
- Name on the foreign account
- Name and address of the foreign bank or financial institution
- Account number or identifying number for the foreign account
- Type of account or foreign asset
- The maximum value in U.S. dollars of the account during the year.
All foreign financial accounts are generally reported on one FBAR, even if the accounts are held only by you or jointly.
While the law does not require any specific record-keeping for the FBAR, it is highly recommended that you keep all of your forms or statements to verify the information stated on the FBAR and the exchange rate you used if you converted foreign currency into U.S. dollars.
Penalties for Non-compliance
Failure to comply with FBAR filing requirements can lead to severe penalties. Both civil and criminal penalties can apply when an FBAR is not timely filed.If you fail to file the FBAR, you may be penalized up to 50% of the account or asset value that was not reported.This means you could lose up to half of the value of your foreign account or asset by not filing the FBAR.
Other Foreign Compliance Forms
If you are reporting foreign assets on the FBAR, you may also have the requirement to report these assets elsewhere. If you have a foreign bank account, there are boxes on Schedule B that may need to be checked. Additionally, you may have income to report on your Schedule B. Other common forms to report foreign assets include Form 8938, Form 3520 or Form 3520A, or Form 5471. The specifics surrounding your foreign asset reporting will dictate the form or forms you need to file and how and where the forms need to be filed.
What If I Have Failed to File FBARs for One Or Multiple Years?
If you have not filed your FBARs and are not already under an investigation by the Department of Treasury, you may be able to file your FBARs and other foreign compliance forms and unreported foreign income through specific programs with a lesser penalty. These programs include the Streamlined Offshore Voluntary Disclosure Program (Streamlined OVDP), and the IRS has a Delinquent International Information Return Submission Program. These programs differ, and weighing your options and potential outcomes with your specific facts and circumstances is essential.
Taxation on Foreign Income from FBAR Accounts or Assets
Foreign income is taxable and would be included on the appropriate form or schedule on your tax return and thus subject to U.S. tax. For example, interest from a foreign bank account would be reported just like interest from a U.S. bank and subject to ordinary income tax.
What If I Have Already Paid Tax To A Foreign Country?
If you paid taxes to a foreign country, you might be eligible for the foreign tax credit. This credit allows you to apply all or part of the tax you have already paid to your total tax bill. Form 1116 is completed to claim the foreign tax credit.
As of July 1st, 2013, the electronic version of the FBAR is currently available and must be filed electronically. This is part of FinCEN’s efforts to streamline the filing process and make it more efficient.
In addition, FinCEN has provided some relief to victims of recent natural disasters, allowing them more time to meet their FBAR filing obligations. This is a reminder that the government considers extraordinary circumstances that may affect taxpayers’ ability to file on time.
If you have any questions about whether you have an FBAR filing requirement or have the FBAR filing requirement and have not filed, it is highly recommended that you speak with a tax professional, preferably one specializing in international tax compliance, to determine your compliance requirements and options. FBAR compliance is critical and can lead to hefty civil and criminal penalties.