Many US taxpayers have foreign bank and financial accounts that they are required to report. However, many of these foreign account holders do not report it, which is why the FBAR, also known as FinCEN Form 114, was created.
The FBAR helps the US identify unreported income and foreign accounts. “Every American citizen has an obligation to the state. Failure to meet those obligations has repercussions,” says attorney John Pontius. Pontius Tax Law.
The purpose of FBAR is to notify the Internal Revenue Service (IRS) of any accounts or other assets taxpayers have outside of the United States. The IRS here helps enforce FBAR compliance and assess and enforce foreign account sanctions against taxpayers who do not comply with FBAR rules.
Essential FBAR Filing Facts for 2022
While completing United States tax returns is a well-known necessity for Americans living abroad, the Foreign Bank Account Report (FBAR) is overlooked by many. Failure to file the FBAR can attract IRS investigation and severe penalties. Here are vital points to note about filing an FBAR to ensure you are compliant and off the IRS hit list:
#one. FBAR Filing Deadline
The annual filing deadline for the FBAR is April 15. If you are unable to file the form before the FBAR filing date, an automatic FBAR extension will be granted until October 15. If you need to file the form after October 15, you must meet particular requirements to extend the deadline.
#two. What accounts should be on the FBAR?
Bank accounts and financial accounts, such as securities accounts (brokerage and securities derivatives accounts), foreign pension/retirement accounts, and investment accounts, must all be on the FBAR. In addition, cash value insurance policies (including whole life insurance), mutual funds or similar pooled assets, and any other accounts held by a foreign financial institution must also be on the FBAR.
Certain accounts, however, are not required to file an FBAR. Accounts managed by the United States military financial institution, owned by an international financial institution or government agency, and held in an individual retirement account in its name are exempt. Correspondent or Nostro accounts, accounts held in a retirement plan in your name, and accounts held in a trust of which you are a beneficiary are also exempt.
#3. Who is required to file an FBAR?
It is important to note who must file an FBAR. People who must file an FBAR include the following:
- An individual from the United States: Under the FBAR rules, any individual or business that meets the definition of a US person is required to file an FBAR. Citizens, residents, corporations, partnerships, limited liability companies, trusts, and estates are considered United States persons for FBAR reporting purposes. Additionally, if a non-US citizen passes the green card or significant presence tests (two criteria used to assess a taxpayer’s residency status), they are considered a resident.
As a result, if you have a financial interest in or signature of authority over one or more financial accounts located outside of the United States, you are required to file an FBAR. Even if the account does not generate taxable income during the year, it must be on the report.
Another requirement to complete an FBAR is that the total value of all your foreign financial accounts exceed $10,000 at any time during the calendar year. Total value refers to the total value of all accounts. In other words, even if no accounts in the year reach $10,000 and the total amount of all your accounts exceeds $10,000 at any time, you still need to file this form.
- If you have signature authority over an account: the FBAR form is not just for account holders who control the account. It also applies to taxpayers with signing authority, which means that the taxpayer does not have to have the funds in the foreign accounts to be required to file the FBAR form. Even if your designation is a signatory on the foreign account, the taxpayer must file the FBAR.
- Minors may also present: minors are not exempt from completing the FBAR form. As a result, if her young son has enough foreign account balances to meet the FBAR filing threshold, she still must submit the FBAR.
#4. What happens if you miss the FBAR deadline?
The repercussions of missing FBAR deadlines are severe. Failure to file the FBAR can result in heavy penalties and fines that can be costly.
Even if the failure was due to an honest misunderstanding of the laws, the civil penalties for unintentional FBAR violations could be as high as $13,481 per violation. The penalty for willful FBAR violations can be up to $134,806 or 50% of the total bill per violation. Along with civil penalties, criminal penalties can include fines of up to $500,000 and imprisonment for up to ten years.
How to file the FBAR
Unlike your federal tax return, FBAR filings are sent to the United States Department of the Treasury, specifically FinCen, rather than the Internal Revenue Service. The FBAR is not mailed. Instead, it is done electronically through the Financial Crimes Enforcement Network’s BSA electronic filing system.
Someone else may file the FBAR on your behalf. However, you must file FinCEN Report 114a, Record of Authorization to File FBAR Electronically. This form is not part of your FBAR submission. Instead, make a copy and keep it to give to the IRS if needed.
How to meet with FBAR compliance
While many taxpayers voluntarily meet their obligations, some do not. There is a wide range of civil and criminal penalties for non-compliant taxpayers; failure to cooperate voluntarily may result in imprisonment, fines, and other penalties.
If you have knowingly failed to comply with taxes or tax-related duties, making a voluntary disclosure may be one way to remedy your failure and avoid criminal prosecution. Voluntary disclosure is not the only option for taxpayers who have not yet filed their FBARs on time. Streamlined Filing Procedures, DIIRSP, DFSP, and other IRS programs are also available.
If you do not comply, you should speak with an experienced attorney before making any affirmative statements to the IRS.
It is your responsibility as a United States citizen to file the FBAR. The only surefire approach to avoiding IRS penalties and fines is to ensure compliance with FBAR standards. Also, before making any positive disclosures to the IRS, you should consult with an experienced attorney if you do not meet the requirements.
Produced in association with Craig Lebrau