Navigating the world of taxes as a U.S. citizen overseas? Then you’ve likely come across the term FBAR – the Foreign Bank Account Report. We recognize that for U.S. expats, tax compliance goes beyond ticking boxes on forms. It’s about truly grasping your obligations and rights in foreign lands. At 1040 Abroad, our mission is to offer crystal-clear insights that enable you to act confidently. Rest assured, we won’t use scare tactics. Instead, consider us your trusted companion on this journey to compliance.
What is FBAR?
FBAR stands for Foreign Bank Account Report, a disclosure requirement mandated by the United States Treasury Department. It is officially known as FinCEN Form 114 and is separate from your income tax return. The FBAR is designed to provide the U.S. government with information about financial accounts held by U.S. persons in foreign countries.
Who needs to file an FBAR?
If you’re a U.S. individual or entity—be it a citizen, resident, or any form of business organization like an LLC or trust—you’re obligated to file an FBAR. The criteria are straightforward:
1) You must have either financial interest or control (like signature authority) over one or more financial accounts situated outside the U.S.
2) The combined value of these accounts must have exceeded $10,000 at any point during the year you’re reporting. It doesn’t matter if the account generated taxable income; its foreign location alone makes it subject to FBAR.
Common Exceptions to the Rule
However, not all foreign accounts trigger this requirement. You’re off the hook if your accounts are:
- Nostro or Correspondent accounts
- Owned by a government body or an international financial institution
- Managed within a U.S. military banking facility
- Part of an IRA or retirement plan where you’re either the owner or beneficiary
- Included in a trust for which you’re a beneficiary, provided a U.S. entity has already filed an FBAR for these accounts
Additionally, you can skip filing an individual FBAR for the year if:
- All your foreign accounts are already covered in a consolidated FBAR
- You and your spouse co-own all foreign accounts, have completed FinCEN Form 114a, and your spouse has filed an FBAR on time
It’s worth noting that your income tax filing status—whether you file jointly or separately as a married couple—doesn’t impact your eligibility for this exemption.
When to file an FBAR?
The standard filing deadline for FBAR is April 15th, aligning with the U.S. tax deadline. However, If you live outside the United States, you will receive an automatic extension until October 15th to file your FBAR. This extension is automatic and does not require any formal request. It’s important to note that the October 15th deadline is final; unlike U.S. tax returns, which can be extended to December, there are no further extensions available for FBAR filing. Failure to meet this deadline can result in substantial penalties, so timely filing is imperative.
What are the FBAR Penalties for Not Filing?
Non-compliance with FBAR filing requirements can result in substantial financial penalties, and it’s becoming increasingly difficult to fly under the radar. Thanks to international agreements, foreign financial institutions are now obligated to share data about their U.S. clients with the IRS. This makes it easier than ever for the IRS to identify U.S. persons living abroad who are not in compliance with their tax obligations.
You may have already encountered a sign of this increased scrutiny in the form of a letter from your foreign bank. This letter, asks you to confirm your tax residence for tax reporting purposes. Ignoring this letter or failing to comply with FBAR requirements can trigger a series of monetary penalties, which are as follows:
- Non-Willful Violations: Should you neglect to submit an FBAR and the oversight is considered non-willful, you could face a penalty per violation of up to $10,000.
- Willful Violations: If you knowingly fail to file, the penalties are much steeper. You could face a fine of up to 50% of the balance in the unreported account at the time of the violation, or a minimum of $100,000.
- Criminal Penalties: In extreme cases, willful non-compliance can also result in criminal charges, which could lead to imprisonment.
Given the high stakes involved and the IRS’s enhanced ability to detect non-compliance, it’s more important than ever to ensure that you file your FBAR accurately and on time.
What happens if I file FBAR late?
File As Soon As Possible: The most effective way to mitigate potential penalties is to file your overdue FBAR as soon as possible. Based on our extensive experience with U.S. expatriates, those who proactively address their filing lapses are often not subject to penalties. The IRS tends to be more lenient with individuals who demonstrate a genuine effort to rectify their oversight in a timely manner.
Options for Multiple Years of Unfiled FBARs: If you have several years’ worth of unfiled FBARs, don’t lose hope. You may still qualify for one of the IRS’s amnesty programs, such as the Streamlined Filing Compliance Procedures or the Delinquent FBAR Submission Procedures. These programs offer a pathway to become compliant without facing penalties. However, eligibility for these programs is generally contingent upon not having been previously contacted by the IRS regarding your FBAR delinquency.
How to File an FBAR?
The FBAR is not part of your U.S. federal tax return and needs to be filed independently. Instead of submitting it to the IRS, you’ll send it to the Financial Crimes Enforcement Network (FinCEN), a distinct agency under the Department of the Treasury. The form you’ll use is FinCEN Form 114, and it must be e-filed via FinCEN’s BSA E-Filing System.
The procedure is relatively simple: collect all necessary account details and input them into the online platform. If you prefer, you can enlist the services of a qualified tax preparer to handle it for you. To authorize them, you’ll need to sign or electronically sign FinCEN Form 114a.
Note/Tip: Our firm offers specialized FBAR preparation services for a flat fee of $100, covering FBAR preparation and electronic filing, regardless of the number of foreign accounts you have.
Types of Accounts and Assets Subject to FBAR Reporting Requirements
When it comes to FBAR, it’s crucial to understand that not all bank accounts are the same. Savings, checking, and time deposit accounts held in foreign institutions are all considered financial accounts that American citizens must report. While these accounts are what most people typically think of as “bank accounts,” it’s worth noting that not all accounts with foreign financial institutions fall under FBAR reporting. For instance, safe deposit boxes are not subject to FBAR.
Brokerage and Investment Accounts
Brokerage accounts, often holding a variety of investment assets like securities and derivatives, are another category that falls under FBAR reporting. The primary factor for FBAR inclusion is whether the account contains financial assets. Mutual funds and other investment accounts are also subject to FBAR regulations. The specific criteria for reporting these accounts include the types of assets held, their value, and any accrued but non-distributed income, which can impact taxation.
Various types of foreign retirement accounts, such as IRAs and 401(k)s held in foreign financial institutions, are also FBAR-reportable. The necessity of reporting these accounts is critical, given the stiff penalties for non-compliance.
Insurance and Annuity Policies
Insurance policies or annuities with cash surrender values are considered foreign financial accounts. These must be reported on an FBAR if the combined value of all foreign financial accounts surpasses $10,000 at any point during the calendar year. “Cash surrender value” refers to the amount that can be withdrawn or borrowed against the policy.
Trusts and Estates
Foreign assets held in trusts or estates have unique reporting requirements. These should be reported on both the FBAR and Form 8938, depending on specific circumstances. Types of trusts or estates that require reporting include foreign trusts and foreign foundations. Failure to comply can result in severe penalties.
LLCs and Business Interests
Limited liability companies (LLCs) are not exempt from FBAR filing. Criteria for LLC reporting include the nature of the business, the types of assets held, and the ownership structure. LLCs that hold foreign financial accounts or have foreign financial interests must comply with FBAR regulations.
We offer free tax advice via email to help all US expats understand international tax laws. Whether you’re a client or just reading our blog, our expert tax professionals are ready to assist you. Contact us with any questions or concerns regarding your FBAR filing. We’re committed to providing accurate and timely information to help you navigate these complexities.