Fundamentals of FBAR for Expats, What Expats Should Know

Explaining FBAR Basics in Under 10 Minutes, FBAR Fundamentals

Explaining FBAR Basics in Under 10 Minutes

The US Government requires US Taxpayers who own foreign assets and accounts to disclose this foreign account information on FinCEN Form 114 — otherwise known as the FBAR — in addition to filing a US Tax Return. FBAR refers to the Report of Foreign Bank and Financial Accounts, which is filed by US Persons on FinCEN Form 114 and enforced by the Internal Revenue Service in accordance with Money and Finance (not Internal Revenue Code) section 5314 et seq. Unlike other international information reporting forms, the FBAR is not a Tax Form. Still, the IRS is tasked with assessing and enforcing FBAR Penalties — which has been a US Government compliance priority for several years now. Foreign Bank and Financial Account violations may result in Civil and/or Criminal FBAR penalties — although criminal penalties are rare. Usually, the US Person will get hit with civil penalties, which can range extensively. To reduce or avoid these penalties the IRS has developed several amnesty programs, collectively referred to as offshore voluntary disclosure. We have prepared a summary explaining the basics of the FBAR, who has to file, and when.

Who is a US Person for FBAR Purposes?

A US person is more than just an individual. Rather, a “US person” refers to a citizen or resident of the United States, as well as certain entities that were created under US law. Some examples include a corporation, partnership, trust, limited liability company, and even an estate. 

What Is a Financial Account?

A financial account is more than just a bank account. Rather, a foreign financial account can include several different items that are reportable, such as checking and savings accounts; securities accounts; commodity futures or options accounts; insurance policies; mutual or other pooled funds; and more.

While (at the time of this article) cryptocurrency is not required to be reported unless the account holds other types of currencies in addition to cryptocurrency, Notice 2020–2 shows that the US government has every intention of requiring virtual currency as a reportable account under 31 CFR 1010.350.

Determining Maximum Account Value for FBAR

The reporting requirement is that those who have to file an FBAR must report the maximum account value throughout the year. Generally, this is done by translating or exchanging foreign money into US dollars using the exchange rate on the last day of the year – noting that the IRS recommends using the Treasury Department exchange rates, which can be found here.

What Is a Financial Interest?

There are two main categories for reporting foreign accounts on the FBAR: (1) accounts in which a person has a financial interest and (2) accounts in which a person has no financial interest but rather has a form of signature authority. The publication sets forth various examples of when a person is considered to have a financial interest and it is clear from the examples that there are many situations that would require a person to report the account. For example, if an account is for a Domestic Corporation, the reporting can get more complicated. Those with US entities should consider the different reporting requirements and what the IRS deems a financial interest.

Understanding Jointly Held Account FBAR Reporting

One common misunderstanding is when people report joint accounts, they only report their interest in the joint account. For example, if a person is a third owner of an account with $150,000 in it, they only report $50,000, but that is incorrect. IRS Publication 5569 makes it clear that if a person has an interest in a joint account, then the entire value of the account (and not just the portion of the account they own) is reportable.

FBAR Exceptions to Filing

There are some exceptions to having to file the FBAR, but they are far and few between, and more often than not, a person will have to file an FBAR. One common exception is when a person owns a US retirement account in which the retirement account may have some foreign holdings that would otherwise qualify for FBAR reporting. Since they are held within a US IRA or tax-qualified retirement plan (and not individually), reporting may be avoided in these situations.

Due Date for FBAR Filing

The FBAR is technically due in April when taxes are due. Previously, the form was due on June 30. While April is the due date for filing the FBAR, the form is currently on automatic extension and has been for the past few years. By being an automatic extension, that means that the taxpayer has until October without having to file any additional extension form such as Forms 4868 or 7004.

FBAR Penalties Explained

2023 will go down in the tax record books as a banner year for taxpayers across the globe who have unreported foreign accounts and are facing FBAR penalties. That is because the Supreme Court issued a ruling in February of 2023, limiting civil non-willful FBAR penalties — the most common type of foreign bank account penalty — to a $10,000 per year penalty. Prior to this ruling, the IRS seemingly had carte blanche to issue penalties upwards of $10,000 per account, per year— typically not to exceed the 50% willfulness threshold (the $10,000 adjusts for inflation each year). As a result of this new Supreme Court ruling, even if a taxpayer failed to report millions of dollars in their foreign accounts, as long as they are non-willful, the IRS will be limited to issuing a $10,000 per year penalty if they were found to be non-willful.

Court Ruling is Limited to Civil Non-Willful FBAR Penalties

It is important to take the Court’s ruling in stride, specifically as to the fact that the IRS still has the power to issue willful penalties, which can reach 50% maximum value of the highest value of the unreported accounts each year. While there is also the potential of criminal FBAR penalties, don’t get too overwhelmed by all the nonsense and fearmongering you will undoubtedly find online about going to jail or prison for an FBAR violation. In general, criminal FBAR penalties are rare – and they typically only rear their ugly head in situations in which other crimes have been committed, such as money laundering, structuring, smurfing, etc. Let’s take a look at what the FBAR penalties may look like in 2023 and beyond.

Non-Willful Civil FBAR Penalties

According to the court’s new ruling, non-willful Civil FBAR penalties are limited to a ‘per form, per year’ penalty. In other words, even if a Taxpayer failed to report 22 foreign financial accounts in a single year on the FBAR, the penalty is limited to one penalty per year — because it is based on the form being filed and not the number of accounts.

Willful Civil FBAR Penalties

The penalties for willful FBAR penalties can be substantial. The IRS has the right to issue penalties upwards of 50% of the maximum aggregate value of unreported foreign accounts per year, for six (6) years. In recent years, the total FBAR penalty for the entire compliance period has generally been limited to a 100% maximum value for the non-compliance period — noting that it previously used to be a 300% maximum, with 300% representing the fact that it is a 50% penalty per year — and the statute of limitation is for six years.

Willfulness is not the same as ‘Intent’

Taxpayers do not have to have acted intentionally in order to become subject to willful FBAR penalties. That is because there are two lower levels of behavior that qualify as willful: Reckless Disregard and Willful Blindness. Unfortunately, there is no hard and fast rule as to how a person is deemed to have acted with reckless disregard or willful blindness. The IRS’s findings of willfulness are based on the application of a ‘totality of the circumstance’ approach for each taxpayer. Willful FBAR penalties are not impacted by the new ruling.

Criminal FBAR Penalties

Taxpayers can also become subject to criminal penalties if they are deemed to be criminally willful. Like any criminal case, the Taxpayer hast to be found guilty by a jury of his peers and the Government must show the crime was committed ‘beyond a reasonable doubt.’ In general, criminal FBAR liability is rare and limited in situations in which there are various other issues at play such as hiding offshore money, tax evasion, structuring, etc.

Other Foreign Account Reporting Forms to File

While the FBAR is the most common of the international reporting forms (due to the fact that it encompasses many different types of categories of accounts), it is just one of several international reporting forms that may be required. Oftentimes, taxpayers will have to file several forms in order to comply with the requirements for foreign financial accounts and other assets, such as FATCA Form 8938; Foreign Gifts and Trusts (Form 3520/3520-A); and Passive Foreign Investment Companies (Form 8621).

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.