Mandatory reporting of foreign bank accounts FBAR. What is it and why is it important?
Where did FBAR come from?
This law came into force in the 1970s intending to prevent tax evasion. It existed for many years, yet it wasn’t enforced and the majority of us have never heard about it. In 2010 information about this law appeared out of thin air, mostly due to the creation of a law named FATCA – Foreign Account Tax Compliance Act. Suddenly foreign account reporting came back to the discussion field and serious enforcement began. Responsibility for collecting the information fell on the shoulders of the IRS and FinCen (Financial Crime Enforcement Network).
You probably have heard about such a scandal as the Panama Papers. The essence of the scandal is the leak of documents from the law firm Mossack Fonseca. A total of 11.5 million files have leaked from the world’s 4th largest legal offshore firm. These documents mention more than 214 thousand offshore companies from 200 countries. These documents unveiled countless secret offshore tax schemes used by rich people.
Many well-known politicians and famous people from all over the world were involved in these fraudulent schemes. As a result of complex financial transactions, hundreds of millions of dollars were deposited into the accounts of their dummy firms. After the publication of these documents, the United States introduced a new FATCA law and began to implement the forgotten FBAR law.
The law in theory makes it easier for the US government to track individuals and businesses that receive income from deposits in foreign bank accounts. This law is not regulated by the IRS. It is run by the US Financial Crimes Agency – FinCEN, the agency is not part of the IRS, but they share information with each other. Collectively, the FBAR and FATCA laws dictate the reporting of our foreign accounts.
How does FBAR work?
Most importantly, if you have accounts abroad, this fact must be reported, regardless of the balance, even if the balance is $0. Where and how you submit your information will depend on the total amount. It is necessary to look at all your bank accounts in aggregate if you have one, two, or more accounts outside the United States.
If the balance in the aggregate on all accounts on any day of the year is less than $10K, then everything is simple, in your tax return in schedule B, which is attached to tax form 1040, you simply tick the box. By doing this, you are informing the US tax office that you have accounts abroad and are not subject to additional reporting.
If during the year you had more than $10K in total on all accounts, then another FBAR tax form is submitted, and more correctly, it is Form 114, which is submitted to FinCen.
What you must know you FBAR
The law has no age limit. If your minor child has American citizenship, and he has never worked, and his parents are constantly saving money in his account, and the balance in the aggregate exceeds more than $10K, then even the child needs to submit an FBAR.
Important to know that the law covers not only a bank account, savings account, fixed deposit (CD), but also pension and insurance savings, as well as any investment financial contributions.
The IRS considers foreign financial assets as financial accounts, including bank accounts, funds, investments that are held in institutions of other countries, as well as securities, bonds, stocks, even if they are held in an investment account, as well as relationships with a foreigner, partnership, trust, legal entities, and foreign corporations.
What penalties can I face if I fail to submit FBAR?
If you fail to file FBAR, this can lead to criminal punishment, as well as large fines and sanctions, up to 100% of the amount that was in the account, or $10K for unintentional failure to submit a report, or $ 100 thousand, or 50% of the amount on the account. It all depends on how seriously you violated the law. Please note, when calculating the fine, the last six years of activity are taken into account.
Additional reporting FBAR criteria you must know
If you one an account jointly with someone, for example with your spouse, and thus have signatory authority, then you also need to report such an account. If you have signatory authority over your business accounts, then you also need to report them. If you are listed as a signatory person with your parents, then you also need to report this account.
Important to know about FBAR and Form 8938
If you hold a US passport or green card, FATCA requires financial institutions around the world to provide financial information about their US citizens or US residents.
Immigrants, residents, US citizens with foreign financial assets, including foreign accounts that cross a certain threshold, must submit an additional form to the IRS – Form 8938. It is submitted together with the tax return. The separate threshold depends on whether you live in the United States or live abroad, how you file your taxes jointly or separately.
A summary about necessary FBAR reporting:
- If all your bank accounts have less than $10K – you need to submit schedule B to the IRS
- If all accounts have more than $10K – you need to submit schedule B to the IRS + FBAR Form 114 to FinCEN
- If all accounts have significant balances identified by the IRS – you must submit schedule B to the IRS + FBAR Form 114 to FinCEN + form 8938 to the IRS
Remember! FBAR is filled only for foreign accounts!
- Report includes personal data, such as SSN.
- FBAR is filed separately for everyone (for example, spouses). There is no joint FBAR.
- If you closed your bank account before the end of the year and it met the criteria, you still need to submit FBAR and indicate that the account is closed.
- FBAR is an annual report due on April 15th following the reporting calendar year. You are automatically granted an extension until October 15th, if you do not meet the FBAR annual deadline on April 15th. You do not need to request an extension to file an FBAR.
- Do not forget that in many cases financial information is indicated twice. Once in the FBAR and the second time in form 8938.
- FBAR is filled only for foreign accounts. If you have an American account, FBAR is not needed.