FBAR Submission Guide: U.S. Taxation & Reporting Rules

As per the Internal Revenue Service, U.S. Government website information, “Per the Bank Secrecy Act, every year you must report certain foreign financial accounts, such as bank accounts, brokerage accounts, and mutual funds, to the Treasury Department and keep certain records of those accounts. You report the accounts by filing a Report of Foreign Bank and Financial Accounts (FBAR) on Financial Crimes Enforcement Network (FinCEN) Form 114.” Clearly, the word “you” refers to the taxpayer under U.S. taxation. Let me explain the various features of this important statement for our knowledge.

More Information About the History of FBAR

The Bank Secrecy Act (BSA) gave the Department of the Treasury authority to collect information from U.S. persons who have financial interests in or signature or other authority over financial accounts maintained with financial institutions located outside the United States.

This provision of the BSA requires that U.S. persons file a FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), if the aggregate maximum values of the foreign financial accounts exceed $10,000 at any time during the calendar year.

FinCEN Form 114 supersedes Treasury Form TD F 90-22.1 and is available online only through the BSA E-Filing System.

In April 2003, the Financial Crimes Enforcement Network (FinCEN) delegated FBAR enforcement authority to the Internal Revenue Service (IRS). The IRS is responsible for:

• Investigating possible civil violations;
• Assessing and collecting civil penalties; and
• Issuing administrative rulings.

Details About FBAR Statements

What is FBAR?
FBAR is a Report of Foreign Bank and Financial Accounts (FBAR).

What is the Purpose of FBAR?
U.S. persons maintain overseas financial accounts for a variety of legitimate reasons, including convenience and access. Foreign financial institutions may not be subject to the same reporting requirements as domestic financial institutions. The FBAR is used by the U.S. government to identify persons who may be using foreign financial accounts to circumvent U.S. law. FBAR information can help identify or trace funds used for illicit purposes or identify unreported income maintained or generated abroad.

A U.S. person, including a citizen, resident, corporation, partnership, limited liability company, trust, and estate, must file an FBAR to report:

1. A financial interest in or signature or other authority over at least one financial account located outside the United States if
2. The aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported.

Generally, an account at a financial institution located outside the United States is a foreign financial account. Whether the account produced taxable income has no effect on whether the account is a foreign financial account for FBAR purposes.

There is often a lot of confusion among taxpayers about what constitutes a financial account. The IRS reference guide clarifies this as follows:

Financial Account
Financial accounts include:

• Bank accounts such as savings and checking accounts, and time deposits (fixed deposits for green card holders from India or U.S. citizens investing there).
• Securities accounts, such as brokerage accounts, securities derivatives accounts, or other financial instruments accounts.
• Commodity futures or options accounts.
• Insurance or annuity policies with a cash value (such as a whole life insurance policy).
• Mutual funds or similar pooled funds (i.e., a fund available to the public with a regular net asset value determination and regular redemptions).
• Any other accounts maintained in a foreign financial institution or with a person performing the services of a financial institution (e.g., all scheduled commercial banks in India).

Examples:

• Canadian Registered Retirement Savings Plan (RRSP), Canadian Tax-Free Savings Account (TFSA), Mexican individual retirement accounts (Fondos para el Retiro), and Mexican Administradoras de Fondos para el Retiro (AFORE) are foreign financial accounts reportable on the FBAR.
• Foreign hedge funds and private equity funds are not reportable on the FBAR.
• A foreign account holding virtual currency is not reportable on the FBAR unless it’s a reportable account under 31 C.F.R. 1010.350 because it holds reportable assets besides virtual currency.

These funds aren’t reportable at this time, per FBAR regulations issued by FinCEN on February 24, 2011. However, FinCEN Notice 2020-2 indicates FinCEN’s intention to propose amending the regulations to include virtual currency as a type of reportable account under 31 CFR 1010.350.

A financial account maintained with a financial institution located outside of the U.S. is a foreign financial account. It is the location of the account, not the nationality of the financial institution, that determines whether an account is “foreign” for FBAR purposes.

Examples:

• An account maintained with a branch of a U.S. bank physically located in Germany is a foreign financial account.
• An account maintained with a branch of a French bank physically located in Texas isn’t a foreign financial account.
• Ed, a U.S. citizen, purchased securities of a French company through a securities broker located in New York. Ed doesn’t need to report these securities because he purchased the securities through a financial institution located in the U.S.

Taxpayers Need Not Report the Following Accounts:

• Correspondent/Nostro accounts.
• Owned by a governmental entity.
• Owned by an international financial institution.
• Maintained on a U.S. military banking facility.
• Held in an individual retirement account (IRA) of which you’re an owner or beneficiary.
• Held in a retirement plan of which you’re a participant or beneficiary.
• Part of a trust of which you’re a beneficiary if a U.S. person (trust, trustee of the trust, or agent of the trust) files an FBAR reporting these accounts.

Taxpayers needn’t file an FBAR for the calendar year if:

• All foreign financial accounts are reported on a consolidated FBAR.
• One jointly owns all foreign financial accounts with their spouse and:
  • He completed and signed FinCEN Form 114a authorizing his spouse to file on his behalf, and his spouse reports the jointly owned accounts on a timely-filed signed FBAR.

Note: Income tax filing status, such as married-filing-jointly and married-filing-separately, has no effect on your qualification for this exception.

The FBAR Resources Below Provide More Detailed Information

When to File
The FBAR is an annual report, due April 15 following the calendar year reported. You’re allowed an automatic extension to October 15 if you fail to meet the FBAR annual due date of April 15. You don’t need to request an extension to file the FBAR.

If you’re affected by a natural disaster, the government may further extend your FBAR due date. It’s important that you review relevant FBAR relief notices for complete information. The government continues to extend the FBAR due date for certain employees or officers with signature or other authority over, but no financial interest in, certain foreign financial accounts.

How to File
Taxpayers must file the FBAR electronically through FinCEN’s BSA E-Filing System. They don’t file the FBAR with the federal tax return. If a taxpayer wants a CPA to file the FBAR on their behalf, the use of FinCEN Report 114a, Record of Authorization to Electronically File FBARs, authorizing that person to do so is required. The CPA will hand over FinCEN Report 114a when filing the FBAR to be kept as records and made available to FinCEN or the IRS upon request. Though any CPA will assist, it is the duty of any taxpayer filing this important statement to keep form 114a.

Keeping Records
For each account taxpayers must report on an FBAR, proper records are to be kept, including:

• Name on the account.
• Account number.
• Name and address of the foreign bank.
• Type of account.
• Maximum value during the year.

The law doesn’t specify the type of document to keep with this information. Documents may include bank statements or a copy of a filed FBAR if they have the required information. Generally, one must keep these records for five years from the due date of the FBAR.

Exception: An officer or employee who files an FBAR to report signature authority over an employer’s foreign financial account doesn’t need to personally keep records on these accounts. The employer must keep the records for these accounts.

Filing Delinquent FBARs
Filing an FBAR late or not at all is a violation and may subject one to penalties. If the IRS hasn’t contacted a taxpayer about a late FBAR and the taxpayer is not under civil or criminal investigation by the IRS, late FBARs must be filed as soon as possible to keep potential penalties to a minimum. Taxpayers may explain the reason for filing late. If a compliance option, such as the Streamlined Filing Compliance Procedures, is used with the help of a CPA, the instructions for the specific compliance option will be followed.

Representation for FBAR Issues
One can authorize someone to represent them for FBAR matters. To do so, one may use Form 2848, Power of Attorney and Declaration of Representative, or a general power of attorney form executed under applicable state law. If using Form 2848, complete Line 3, Acts Authorized, as follows:

• Under Description of Matter – Matters relating to Report of Foreign Bank and Financial Accounts or “FBAR Examination.”
• Under Tax Form Number – FinCEN Form 114.
• Under Year(s) or Period(s) – applicable calendar year(s).

What About Consequences of Non-Filing of FBAR?

Taxpayers may be subject to civil monetary penalties and/or criminal penalties for FBAR reporting and/or recordkeeping violations. The assertion of penalties depends on the facts and circumstances. Civil FBAR penalty maximums in Title 31 of the United States Code are adjusted annually for inflation.

Let me reluctantly provide details about the harsh, effective penalties pursued continuously by the IRS and other authorities due to taxpayers who have avoided filing these statements and landed in legal troubles. I have encountered taxpayers who unwittingly failed to file FBAR statements and faced substantial penalties.

Penalties

Those who must file an FBAR and fail to timely file a complete and correct FBAR may be subject to civil monetary penalties, criminal penalties, or both. When a U.S. person learns they should have filed an FBAR for an earlier year, they should electronically file the late FBAR using the BSA E-Filing System.

They can enter the calendar year reported, including past years, on the online FinCEN Form 114. They should “explain a late filing” or select “Other” to enter up to 750 characters within a text box to explain the late filing or indicate whether the filing is made in conjunction with an IRS compliance option. If they properly report the foreign financial account on a late-filed FBAR, and the IRS determines the FBAR violation was due to reasonable cause, no penalty will be imposed.

Some additional information quoted from the IRS website for informational purposes:

• Negligent Violation
  • Civil Penalty Authority: 31 USC § 5321(a)(6)(A)
  • Civil Penalty Amount: Up to the amount in 31 CFR § 1010.821
  • Criminal Penalties: N/A
  • Comments: Doesn’t apply to individuals.
• Pattern of Negligent Activity
  • Civil Penalty Authority: 31 USC § 5321(a)(6)(B)
  • Civil Penalty Amount: Up to the amount in 31 CFR § 1010.821
  • Criminal Penalties: N/A
  • Comments: Doesn’t apply to individuals. Applies in addition to the 31 USC § 5321(a)(6)(A) penalty.
• Non-Willful Violation
  • Civil Penalty Authority: 31 USC § 5321(a)(5)(B)
  • Civil Penalty Amount: Up to the amount in 31 CFR § 1010.821
  • Criminal Penalties: N/A
  • Comments: Applies to all U.S. persons.
• Willful Violation
  • Civil Penalty Authority: 31 USC § 5321(a)(5)(C)
  • Civil Penalty Amount: Up to the greater of:
    • The amount in 31 CFR § 1010.821, or
    • 50% of the amount in the account at the time of the violation
• Criminal Penalties:
  • Knowingly and Willfully Filing False FBAR: Up to $10,000 or 5 years imprisonment or both (18 USC § 1001; 31 CFR § 1010.840(d))
  • Failure to File FBAR or Retain Required Records: Up to $250,000 or 5 years imprisonment or both (31 USC § 5322(a); 31 CFR § 1010.840(b)). If certain other laws are also violated, the penalty increases to up to $500,000 or 10 years imprisonment or both (31 USC § 5322(b); 31 CFR § 1010.840(c))
  • Comments: Applies to all U.S. persons.

Filing an FBAR late or not at all is a violation and may subject one to penalties. In such cases, it is advisable to contact a CPA to address the matter.

Examples from IRS Website

• Example 1: Doug has a financial interest in 12 foreign financial accounts and signature authority over 17 foreign financial accounts. Doug must complete the entire FBAR because he has a financial interest in fewer than 25 foreign financial accounts and signature authority over fewer than 25 foreign financial accounts.
• Example 2: Julia is a U.S. person who lives in Ireland and is employed by an Irish company. She only needs to complete Part I, Part IV, Items 34-43, and the signature section of the FBAR to report her signature authority over the foreign financial accounts of her employer. If Julia lived in the U.S., she would not be able to take advantage of the modified reporting requirement and must fill out the FBAR form in its entirety.

Trust Beneficiaries: A beneficiary of a trust in which the beneficiary has a financial interest (defined in “Financial Interest” above) doesn’t need to report the trust’s foreign financial accounts on an FBAR if the trust, trustee of the trust, or agent of the trust is a U.S. person and files an FBAR disclosing the trust’s foreign financial accounts.

Many U.S. citizens are confused about being trust beneficiaries. The 16 paragraphs with similar instructions on pages 8/9 of the REPORT OF FOREIGN BANK & FINANCIAL ACCOUNTS (FBAR) REFERENCE GUIDE provide useful information.

Conclusion

FBAR has emerged as one of the most important returns that must be compulsorily filed; failing to do so can result in enormous penalties. Diversion of funds has led the IRS to trace those who failed to file this return. Intermingling of accounts between the USA, Canada, the UK, and various popular nations such as France, Italy, Germany, and other European countries has enabled some taxpayers to avoid filing FBAR and evade payment of the correct taxes in the U.S.

Having seen the confiscation of passports for non-payment of taxes due to various lapses, including non-filing of FBAR, I wrote this comprehensive article to help everyone understand the basics and to encourage the use of an expert CPA who can keep records intact, remind taxpayers to pay required taxes on time, and help avoid unnecessary tax payments through legal provisions.

However, this write-up is for informational purposes only and does not constitute legal or tax consultation. Please consult experts such as a CPA or lawyer for tax or legal advice.

Reference IRS FBAR Reference Guide

One can contact me at [email protected] if clarifications are needed.

I advise all taxpayers to avail themselves of the services of an expert tax consultant, like a CPA, to maintain continuous records of tax documents and address any issues raised by tax authorities in a timely manner. U.S. and Indian tax authorities may collaborate, sometimes unbeknownst to taxpayers.

Manage your tax returns wisely to avoid penalties.

Reference Web information reproduced from IRS FBAR Reporting