FBAR: Who Should File?

Under the American tax law, if you are a U.S. citizen who has either signature authority over or a financial interest in any foreign financial account, you are required to report your account annually to the Department of Treasury via electronic filing.

May your foreign financial account be a bank account, trust, or mutual fund, you have the obligation to file both the Financial Crimes Enforcement Network (FInCEN) 114 and Report of Foreign Bank and Financial Accounts (FBAR).

Unfortunately, many U.S. citizens are not very familiar with the FBAR so before they know it, the U.S. government is already there to go after them and their penalties have already piled up.

Cases of U.S. citizens residing outside the U.S. being up the creek for not filing their FBARs are rampant these days, thanks to these people’s ignorance of the law. But since ignorance of the law excuses no one, you can’t just say no one told you about this FBAR thing and expect to be absolved at the end of the day.

U.S. Person

According to the law, you are considered a U.S. person if you are a U.S. citizen, U.S. resident, an entity such as a corporation, partnership, or limited companies created and organized in the U.S. or under U.S. laws, and trusts or estates created under U.S. laws.

The IRS rule also specifies certain exceptions to the FBAR reporting requirements, such as the following:

  • Certain foreign financial accounts jointly owned by spouses
  • persons included in a consolidated FBAR
  • Correspondent/Nostro accounts
  • Government-owned foreign financial accounts
  • International financial institution-owned foreign financial accounts
  • IRAs owners and beneficiaries
  • Tax-qualified retirement plans beneficiaries and participants
  • Certain individuals with no financial interest in but have signature authority over a foreign financial account
  • Trust beneficiaries who are U.S. persons reporting the financial account on an FBAR filed on behalf of the trust
  • Foreign financial accounts maintained in a U.S. military banking facility

In Pomerantz’s case, he is a U.S.-Canadian citizen who owns a foreign financial account so he is required to file an FBAR.

How to Report and File Your FBAR

Reporting and filing your FBAR is required regardless of the taxability of your income. The law states that if you hold a foreign financial account, you are obliged to report even when your account produces no taxable income. You meet your reporting obligation by answering questions about tax returns in foreign accounts and by filing an FBAR.

Since the FBAR is considered a calendar year report, you need to do the filing on or before April 15 of the year following the year in question. You need to file electronically through the e-filing system of FinCEN.

Filing FBAR with a Federal Tax Return

In any case, you should not file the FBAR with a federal tax return. Even when the IRS extends the filing period for the income tax return, that does not mean that the period for filing an FBAR is extended as well. The good news though is that the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 has already been passed, granting taxpayers a maximum six-month extension to file their FBARs. So, should you fail to meet the April 15 deadline for FBAR filing, you have until Oct. 15 of each year to file.

Why You Need to File a Complete and Accurate FBAR

If you want to save yourself from possible civil monetary penalties, make sure that you file your FBAR properly by ensuring its correctness and completeness. FBAR-related penalties depend on whether the violations are willful or non-willful.

For the penalties assessed by the IRS after Aug. 1, 2016 for violations committed after Nov. 2, 2015, the IRS assesses an inflation-adjusted penalty so that it won’t exceed $12,459 per violation for non-willful violations. On the other hand, the inflation-adjusted penalty for willful violations may go above $124,588 per violation.

For violations that occurred on or before Nov. 2, 2015, civil penalties usually do not exceed $10,000 per violation for non-willful violations and greater than $100,000 for willful violations.

When You Are a U.S. Taxpayer Who Holds Foreign Financial Assets

If you are a taxpayer who has foreign financial assets exceeding certain thresholds, you need to file another form in addition to the FBAR—the Statement of Specified Foreign Financial Assets (Form 8938). You file this form with an income tax return.

When You Have Offshore Financial Accounts

Today, the Offshore Voluntary Disclosure Program of the IRS allows those who have unreported taxable income from their foreign assets or other offshore financial accounts the chance to fulfill their reporting obligations, and that includes the FBAR. While this program does not have a particular closing date, you need to do your reporting obligations the soonest time possible as the IRS has all the mandate to close this program anytime.

When You are a Non-Resident U.S. Taxpayer Who Failed To File Required U.S. Income Tax Returns

For U.S. taxpayers who don’t reside in the U.S. and have failed to file the required U.S. income tax returns, the IRS implements certain streamlined filing compliance procedures. These procedures are exclusive to non-resident U.S. taxpayers, whose submissions are reviewed on varying degrees, depending on the response of the taxpayer to a risk questionnaire and on the amount of tax due.

In 2014, the IRS expanded these streamlined procedures to certain taxpayers residing in the U.S. The new procedure stipulates that penalties of eligible U.S. taxpayers who are non-residents should be waived, while penalties of eligible U.S. taxpayers who are U.S. residents will include a miscellaneous offshore penalty. This penalty is equivalent to five percent of the foreign financial assets of the taxpayer in question that caused the tax compliance issue.

When You Failed to File FBAR and Are not Under a Civil/Criminal Investigation by the IRS

If there are streamlined filing compliance procedures in FBAR filing for U.S. taxpayers who are non-residents, there are also procedures that are exclusive to taxpayers who did not file the required FBAR and are not under any criminal investigation by the IRS. If the IRS has not contacted you about a delinquent FBAR, then you need to file any delinquent FBAR through FinCEN’s BSA E-Filing System.

When you enter the system, you need to choose a valid reason for your late filing and enter an explanation using the “Other” option. If your income from your foreign financial accounts are properly reported and you paid your taxes on your U.S. tax return, rest assured that the IRS will not impose any penalty for your failure to file the delinquent FBAR.

For the last handful of years, U.S. taxpayers, residents and non-residents alike, have been grappling with various changes on the IRS’ reporting requirements. Despite these changes, the need for U.S. taxpayers to disclose their foreign assets remains. Criminal and civil penalties as a result of not filing an FBAR have been alarmingly high in the last years and the U.S. government is now more stringent than ever in going after those who fail in this part of the IRS law. So if you don’t want to be in dire straits with the IRS, report when and what you should.