Who Must Report Foreign Bank Accounts?
There are many reasons why you may maintain international bank and financial accounts, and offshore banking is perfectly legal.
However, the IRS does not consider the money held in foreign accounts the same as that held in domestic banks. To put it simply, they apply much greater scrutiny to such assets and seek to discourage U.S. citizens from having offshore or overseas accounts.
The reasons for this aren’t hard to understand; foreign financial institutions may not be subject to the exact reporting requirements as domestic institutions, which increases the risk for tax evasion, and the IRS may be less able to take revenue from such accounts.
Nevertheless, many Americans want or need to maintain financial accounts in other countries in a global economy.
Therefore, you should not take the reporting tax implications of holding your assets in foreign institutions lightly. Ensuring you comply with IRS regulations on foreign bank and financial accounts reporting is essential.
Read on to discover more information on who must report foreign bank and financial accounts, how to report, and what to do if you have failed to meet reporting requirements.
What is an FBAR, and Who Must File?
Even if your foreign financial account or accounts do not generate any taxable income, you may be required to report the account to the Treasury Department as outlined in the 1970 Bank Secrecy Act. You report your interest in foreign bank accounts by submitting the Report of Foreign Bank and Financial Accounts (FBAR).
United States persons are required to file an FBAR if both of the following apply:
- They have a financial interest in or signature authority or other authority over at least one account located outside of the United States. Types of accounts covered by this requirement can include bank accounts, brokerage accounts, and mutual funds.
- The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported.
Note that this applies to United States “persons,” not citizens. The law defines a person as:
- U.S. citizens.
- U.S. residents.
- Entities, including but not limited to corporations, partnerships, or limited liability companies, created or organized in the United States or under the laws of the United States.
- Trusts or estates formed under the laws of the United States.
Exceptions to the Reporting Requirement
Not everyone who holds a foreign financial account necessarily needs to report it. Certain types of U.S. persons and certain accounts are eligible for exclusion from FBAR reporting requirements.
For example, individuals do not need to report foreign accounts on the FBAR if they are in individual retirement accounts, are participants in or beneficiaries of a tax-qualified retirement plan, or are a trust beneficiary (but only if another U.S. person reports the account on an FBAR on behalf of the trust).
Other exceptions, as listed on the FBAR instructions PDF, i nclude:
- Foreign financial accounts jointly owned by spouses if one spouse is authorized to file on the other’s behalf and timely reports the jointly-owned accounts.
- United States persons included in a consolidated FBAR.
- Correspondent/Nostro accounts (maintained by banks and used solely for bank-to-bank settlements).
- Foreign financial accounts owned by a governmental entity.
- Foreign financial accounts owned by an international financial institution.
- Owners and beneficiaries of U.S. IRAs.
- Foreign financial accounts maintained on a United States military banking facility.
Specific individuals with signature authority over, but no financial interest in, a foreign financial account, may also be exempted in certain situations.
An individual is not required to report signature authority over a foreign financial account owned or maintained by a bank, financial institution, or other entity if they are:
- An officer or employee of a bank examined by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, or the National Credit Union Administration.
- An officer or employee of a financial institution registered with and examined by the Securities and Exchange Commission or Commodity Futures Trading Commission.
- An officer or employee of an entity with a class of equity securities listed (or American depository receipts listed) on any United States national securities exchange.
- An officer or employee of a United States subsidiary if its United States parent has a class of equity securities listed on any United States national securities exchange and the subsidiary is included in a consolidated FBAR report of the United States parent.
- An officer or employee of an Authorized Service Provider, if the foreign financial account is owned or maintained by an investment company registered with the Securities and Exchange Commission.
- An officer or employee of an entity with a class of equity securities registered (or American depository receipts in respect of equity securities registered) under section 12(g) of the Securities Exchange Act.
How to Report
The FBAR is an annual report due April 15th of the year following the calendar year you are reporting. However, it is not part of filing a tax return, and you must file it separately and directly with FinCEN.
Since June 2013, all taxpayers required to file an FBAR must do so electronically. You can download a blank copy of FinCEN Form 114 (the FBAR) and file it through the Financial Crime Enforcement Network’s FBAR E-Filing system.
If you cannot e-file your FBAR and must paper-file instead, it is essential to note that you cannot simply print out FinCEN Form 114 and submit it, as that form is for e-filing only.
Instead, for an alternative to e-filing, you will need to call FinCEN’s Regulatory Helpline. From inside the U.S., call 800-949-2732, or from outside the United States, call 703-905-3975.
If FinCEN approves you for an exemption from e-filing, they will send you a paper form to complete and mail in.
If you need someone else to file your FBAR on your behalf, you can authorize them to do so by filling out FinCEN Report 114a PDF, Record of Authorization to Electronically File FBARS. Be sure to keep a copy of the form in your records where you can easily make it available upon request.
What Happens if You Don’t File FBAR?
Not filing can lead to significant penalties. Non-intentional reporting or recordkeeping violations can be subject to penalties of $10,000. (Intentional violations can be worse).
But don’t panic yet — if you have not filed your FBAR, you can likely still do so. If the IRS has not contacted you or opened an examination or investigation into your foreign accounts, you can file your past-due disclosures with a statement explaining why the filing is late.
In practice, as long as you
- report income from the foreign financial accounts accurately and pay taxes on that income through your U.S. tax return, and
- have not received an inquiry from the IRS regarding an income tax examination or a request for delinquent returns for the years for which you are submitting the delinquent FBAR, then
The IRS will not impose a penalty for the failure to file your FBAR. This is obviously no guarantee, and we recommend discussing this with a professional (like us) who understands your situation, but in our experience, people trying to correct mistakes don’t incur huge penalties.
If you do have foreign bank accounts, the best thing to do is file your disclosures annually.
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