All United States entities (including citizens and resident aliens as well as corporations, partnerships, and trusts) with financial interests in or authority over one or more foreign financial accounts (e.g., bank accounts and securities) need to report these relationships to the U.S. Treasury if the aggregate value of those accounts exceeds $10,000 at any time during the year. Failure to file the required forms can result in severe penalties.
The U.S. government wants this information for a couple of pretty obvious reasons. One, foreign financial institutions may not have the same reporting requirements as U.S.-based financial institutions. For example, they probably won’t issue the 1099 forms to report interest, dividends and sales of stock. By requiring those in the U.S. to divulge their foreign account holdings, the IRS can more easily cross-check to see if foreign income is being reported on the individual’s tax return. The second (and probably more significant) reason is that the information in the report can be used to identify or trace funds used for illegal purposes or to identify unreported income maintained or generated overseas.
Due Date and Extension – For 2022, the due date for filing this report was April 18, 2023, but the government grants an automatic extension to October 16, 2023 for those who didn’t file by April 18. This filing, the Report of Foreign Bank and Financial Accounts (FBAR), is not made with the IRS; rather, it involves completing Bank Secrecy Act forms and filing them electronically through the U.S. Treasury’s Financial Crimes Enforcement Network.
Failure to Report Penalties – The government has been very aggressive about levying penalties against those who failed to file a FBAR when required, and even took the position that the penalties applied per each unreported foreign account and not the annual FBAR reporting on FinCEN Form 114. Lucky for taxpayers, after a disagreement in two different tax courts, the issue ended up at the U.S. Supreme Court where the justices ruled the penalties only applied to the FBAR reporting and not per individual account.
A civil penalty of up to $10,000 may be imposed for a non-willful failure to report; the penalty for a willful violation is the greater of $100,000 or 50% of the account’s balance at the time of the violation. Both the $10,000 and $100,000 amounts are subject to inflation adjustment. For penalties assessed afterJanuary 19, 2023, the amounts are $15,611 and $156,107, respectively.A willful violation is also subject to criminal prosecution, which can result in a fine of up to $250,000 and jail time of up to five years.
CAUTION: On Schedule B of the Form 1040 tax return, you must state whether you have a financial interest in or signature authority over one or more foreign financial accounts. If you answer yes but don’t file the FBAR, your failure to file may be considered willful, which could subject you to the larger fine and jail time.
Financial Account – The term “financial account” includes securities; brokerage, savings, checking, deposit and time deposit accounts; commodity futures and options; mutual funds and even nonmonetary assets (e.g., gold). Such an account is classified as “foreign” if the financial institution that holds it is located in a foreign country. Shares of a foreign stock or of a mutual fund that invests in foreign stocks are not considered foreign if they are held in an account at a U.S. financial institution or brokerage, so they do not need to be reported under the FBAR rules.In addition, an account maintained at a branch of a foreign bank is not considered a foreign financial account if the branch is physically located in the U.S.
Unforeseen Foreign Accounts – You may have an FBAR requirement and not even realize it. For instance, say that you have relatives in a foreign country who have put your name on their bank account in case of an emergency; if the value of that account exceeds $10,000 at any time during the year, you will need to file the FBAR. The same would be true if your name was added to several of your foreign relatives’ smaller-value accounts that add up to more than $10,000 at any time during the year. As another example, if you gamble at an online casino that is located in a foreign country and your account exceeds the $10,000 limit at any time during the year, you will need to file the FBAR.
Additional Filing Requirements – You may also have to file IRS Form 8938, which is similar to the FBAR but applies to a wider range of foreign assets and has a higher dollar threshold. Unlike the FBAR that is filed separately, Form 8938 is filed with your income tax return. If you are married and filing jointly, you must file Form 8938 if the value of your foreign financial assets exceeds $100,000 at the end of the year or $150,000 at any time during the year. If you live abroad, these thresholds are $400,000 and $600,000, respectively. For other filing statuses, the thresholds are half of the amounts above. The penalty for failing to file Form 8938 is $10,000 per year; if the failure continues for more than 90 days after the IRS provides notice of your failure to file, the penalty can be as high $50,000.
As you can see, failure to comply with the foreign-account and/or foreign-asset reporting requirements can lead to very severe repercussions. Please call us if you have questions or need assistance meeting your foreign account reporting obligations.
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