- Are you a US citizen, US resident alien or US business entity that has a direct (or indirect) interest in a foreign bank account or other type of foreign financial account?
- Are you a US citizen or a US resident alien who has signing authority over a foreign bank account or other type of foreign financial account?
If so, you may be required to report such accounts to the US Department of Treasury on an annual basis. The final extended due date for the reporting of an interest in a foreign financial account held during 2016 is October 15, 20017. If you fail to report such accounts by October 15, 2017 (or if you have filed to report such accounts in prior years) you may be subject to substantial civil penalties as well as the possibility of criminal penalties.
Overview of FBAR Reporting. A US citizen, US resident alien or US business entity that has a direct (or indirect) financial interest in a foreign bank account or other type of foreign financial account may be required to report such account to the US Department of Treasury on an annual basis. Additionally, a US citizen or US resident alien who has signature authority over a foreign financial account may be required to report such foreign financial account to the US Department of Treasury on an annual basis. Failure to report such foreign financial accounts may subject an individual and/or a business entity to substantial civil monetary penalties as well the possibility of criminal penalties.
Due Date. The due date for the reporting of a direct (or indirect) interest in a foreign financial account held during 2016 was April 18, 2017. However, the US Department of Treasury’s Financial Crimes Network (FinCen) has granted an automatic extension to report the foreign financial account until October 15, 2017. You do not need to make a specific request to be granted the automatic extension. However, no additional extension of time is permitted beyond the October 15, 2017 deadline.
$10,000 Threshold. In general, the annual reporting of an interest in (or signature authority over) a foreign financial account is required if the aggregate value of a US taxpayer’s foreign financial account(s) exceeded $10,000 at any time during a calendar year. The aggregate value is determined by aggregating the highest value of each foreign financial account in which a US citizen, US resident alien or US business entity has a direct (or indirect) interest during the year. In the case of an individual, the aggregate value would also include foreign financial accounts that the individual has signature authority over. If the foreign financial account is not maintained in the US dollar, the maximum foreign dollar value of the account during the year would need to be converted into the US dollar using certain specified conversion rates to determine whether the $10,000 threshold is satisfied.
Qualification as a Foreign Financial Account. The definition of foreign financial account is broad. A foreign financial account includes (but, is not limited to) checking, savings, demand, deposit, securities, brokerage or other accounts maintained with a financial institution (or other person or entity performing the services of a financial institution). A foreign financial account may also include commodity, futures, option accounts, insurance or annuity polices with cash value, and shares in a mutual fund if certain requirements are satisfied. The physical location of the account is a key factor for determining whether the financial account is treated as a US or a foreign financial account. For example, a bank account maintained with a branch of a US bank that is physically outside the US is a foreign financial account. Conversely, a bank account maintained with a branch of a foreign bank that is physically located in the US is not a foreign financial account.
Indirect Ownership. Individuals and business entities should be mindful that they may be treated as owning and may need to report foreign financial accounts that are owned by certain related business entities and trusts. For instance, a US taxpayer will be treated as indirectly owning a foreign financial account of any US or foreign subsidiary corporation in which the US taxpayer directly (or indirectly) owns greater than 50 percent by vote or value. Likewise, a US taxpayer will be treated as indirectly owning a foreign financial account of any US or foreign partnership in which the US taxpayer directly (or indirectly) owns greater than 50 percent of the profits or greater than 50 percent of the capital of the partnership. Accordingly, there may be multiple filing requirements for the same account.
Signature Authority over a Financial Account. An individual generally has signature authority over a financial account if such person has the ability to control the disposition of money, funds or other assets held in a financial account by direct communication to the financial institution with which the account is maintained. Officers and employees may possess signature authority over financial accounts of their employers and are generally obligated to report such authority unless an exception applies. It should be noted that the filing deadline for certain individuals with signature authority over financial accounts of an employer or a closely related entity has been extended to April 15, 2018.
Penalties. Failure to timely file a complete and correct FBAR can result in substantial civil monetary penalties. For non-willful violations, the civil penalties may be as high as $12,459 per violation. If the IRS successfully asserts a willful violation, the civil penalty may be as high as the greater of $124,588 or 50 percent of the balance in each account at the time of each violation. If a taxpayer has multiple accounts, the aggregate amount of civil penalties can be staggering because the penalties are imposed on each violation (that is, for each account that is not reported). A taxpayer may also be subject to the possibility of criminal penalties (up to $250,000 in monetary penalties and/or up to five years in prison).
FBAR Reporting. FBAR reporting must be filed electronically through FinCen’s BSA E-Filing system. FBAR reporting is filed separately from the filing of a US federal income tax return (which may also require the reporting of foreign financial assets on IRS Form 8938).
Remedies for Failure to File. Taxpayers who have not filed a required FBAR and are not under a civil or a criminal investigation by the IRS, and have not been contacted by the IRS about a delinquent FBAR, can file any delinquent FBARs in accordance with FBAR instructions and include a statement explaining why the filing is late. The IRS has stated that it will not impose a penalty for the failure to file the delinquent FBARs if income from the foreign financial accounts reported on the delinquent FBARs is properly reported and taxes are paid on the taxpayer’s US federal income tax return, and if the taxpayer has not previously been contacted by the IRS regarding an income tax examination or a request for delinquent returns for the years in which the delinquent FBARs are submitted. A taxpayer who is not eligible for this relief, may be eligible (depending upon the profile of the taxpayer) for other types of relief such as participating in an Offshore Voluntary Disclosure Program or using Streamlined Filing Compliance Procedures.
Disclaimer. This alert is only intended to provide a high-level overview of the FBAR reporting requirements. There are a number of rules, exceptions and additional detail not covered in this alert. FBAR reporting requirements are complex and are subject to change. Information contained in this article is not intended as legal or tax advice to any person. All readers must rely on their own legal and tax advisors.
If you have any questions on whether you have an interest in (or signature authority over) a foreign financial account and whether you need to report such account, or need assistance with delinquent FBAR filings, please contact John Buckun at 312-344-2888 or Bill Major at 847-527-1012.