Comprehensive FBAR Overview

Navigating the world of international tax requirements and finance can be a complex and intimidating task, especially when trying to understand the requirements and compliance issues related to the Foreign Bank Account Report (FBAR), which is also known as FinCEN Form 114. The goal of this article is to provide a general but detailed outline of the requirement to report foreign bank accounts and assets, and further understand the FBAR, its requirements, and how to ensure compliance.

What is the FBAR?

The United States government requires individuals and under certain circumstances businesses to file a document called the Foreign Bank Account Report (FBAR) with the Financial Crimes Enforcement Network (FinCEN). The FBAR is designed to ensure that foreign assets and foreign income are correctly reported by taxpayers and thus help and assist the Department of Treasury track certain assets and income of U.S. citizens, residents, and businesses and ensure that foreign income is accurately taxed in the United States.

Who Must File an FBAR and Report Foreign Accounts?

A U.S. person, which includes citizens & residents in addition to certain entities such corporations, trusts, partnerships, limited liability companies, and estates, must file an FBAR under certain circumstances. The FBAR filing requirement occurs when a person in the United States has a financial interest in or control over a financial account located outside of the country, and the combined worth or value of all the foreign accounts is over $10,000 (in United States dollars) at any point in time during the year.

It is very important to note that the foreign financial account does not need to generate any income or taxable income for the foreign account to require the need to file the FBAR. If the total balance of all foreign financial accounts exceeds the $10,000 threshold, each and every foreign account or asset must be reported on the FBAR, regardless of whether the taxpayer received income from the foreign account and no matter how small or low certain account’s value may have been during the year.

FBAR Compliance and Filing

Proper compliance with FBAR filing requirements is extremely important. The FBAR report must be submitted annually by April 15th for the previous year, somewhat like your 1040 individual income tax return. In case you miss the due date, you do receive an extension until October 15^th of that year without having to make a request for it. There is no need to file an extension separately for the FBAR.

In regard to filing the FBAR, the FBAR is not filed with your 1040 individual income tax return.  This is true whether or not you report any income from the assets on your individual income tax return.  Rather, the FBAR is electronically filed through FinCEN’s E-filing system. You can paper file the FBAR, but to do so, you must receive an exemption from the E-filing requirement from FinCEN. Furthermore, a third-party such as an attorney or CPA can 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) and social security or employer identification number.
• Name on the foreign account.
• Name and address (including city, country and foreign zip code of the foreign bank or financial institution that holds the account.
• Account number or identifying number of the foreign account.
• Type of account or foreign asset (bank, stock or other); and,
• 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 or titled only by you or jointly.  If an account is held jointly and your spouse reports the account as a joint account with you as a joint holder, you do not need to separately report that specific account but may have other accounts requiring reporting and a separate FBAR.

Although, no law requires any specific record-keeping for the FBAR, as one may assume, it is highly recommended that you keep and maintain all of your forms, bank statements and other pertinent documents 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

Are there penalties for failing to comply and file an FBAR?  Yes!  The failure to comply with FBAR filing requirements may lead to severe penalties. Civil and criminal penalties may apply when your FBAR is not timely filed.  The failure to file an FBAR may lead to you being penalized up to 50% of the account or asset value that was not reported properly.  Thus, you could lose up to half of the value of your foreign account or asset by failing to file the FBAR.

Other Foreign Compliance Forms

If I file an FBAR, are there any other foreign compliance forms I may need to file or does the FBAR satisfy all foreign account reporting requirements?  There are many foreign tax compliance forms that you may have the requirement to file.  Thus, if you are reporting your foreign accounts & assets on the FBAR, you may also have the requirement to report your foreign accounts and assets elsewhere. If you have a foreign bank account, boxes on Schedule B may need to be checked. Furthermore, you may have to report income on your Schedule B.  Common foreign tax compliance forms to report foreign assets include Form 8938, Form 3520 or Form 3520A, or Form 5471. The details and specifics regarding your foreign assets will determine the form or forms you need to file and how and where the forms need to be filed to establish compliance…

What If I Have Failed to File FBARs for One Or Multiple Years?

If you have failed to file your FBARs and are not already under an audit or investigation by the Department of Treasury, you may qualify and be able to file the FBARs and other foreign compliance forms and any unreported foreign income through specific programs to avoid the harsh penalties. These programs include the Streamlined Offshore Voluntary Disclosure Program (Streamlined OVDP), and the IRS also has a Delinquent International Information Return Submission Program. These programs differ in terms of penalties but considering your options and the potential outcomes with your specific facts and circumstances is essential.

Do I Pay Tax on Foreign Income from FBAR Accounts or Assets?

Is the foreign income I have earned taxable in the United States?  Yes, foreign income can be taxable depending upon all of your facts and circumstances and should be included on the appropriate form or schedule on your U.S. 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 in or To Foreign Country?

If you already paid taxes to a foreign country, you may be eligible for a foreign tax credit. The foreign tax credit allows you to apply all or part of the tax you have already paid to a foreign country your total tax bill. Form 1116 is the form you would complete to claim the foreign tax credit.

Any FBAR Updates?

As of July 1st, 2013, the FBAR is in an electronic version and must be filed electronically. This is due in part to FinCEN’s efforts to streamline the FBAR filing process.  Additionally, FinCEN has provided relief to certain victims of recent natural disasters, allowing these individuals or businesses additional time to file their FBAR.

Conclusion Regarding FBAR Filings

It is highly recommended you seek professional advice regarding any questions surrounding your FBAR filing requirements.  Preferably, a tax attorney specializing in international tax compliance, to determine your compliance requirements and options related to different IRS programs.