An Overview of FBAR for U.S. Expats, A Guide for Beginners

FBAR (Who Has to File and Which Accounts to Report)

FBAR for U.S. Expats

The FBAR refers to foreign bank and financial account reporting. The form has been in the news as of late because of a recent Supreme Court decision in the case of Bittner. In that case, the Supreme Court decided that when it comes to non-willful penalties (the most common type of FBAR penalty), the IRS is prevented from penalizing taxpayers for each account that they missed, but rather they are limited to penalizing taxpayers on an annual ‘per form’ basis. It is important to note, that the decision in Bittner has no bearing on willfulness penalties and the Internal Revenue Service can still penalize taxpayers upwards of 50% maximum value for willful violations. At Golding & Golding, we specialize exclusively in international tax matters including FBAR. We have authored countless articles on all aspects of FBAR — but for this article, we wanted to limit it to the seven (7) most basic aspects of FBAR, which are:

• • • What is the FBAR?

    • Who has to file the FBAR?

    • When is the FBAR due?

    • Which foreign accounts do I report?

    • What are some common mistakes to avoid?

    • What are the penalties for missed or incomplete FBAR?

    • How to file late or amended FBAR

What is the FBAR?

The FBAR refers to foreign bank and financial account reporting (aka FinCEN Form 114). It is an electronic form that is required by us persons who have certain foreign accounts. The term accounts can be ambiguous though because it is not limited to just bank accounts or investment accounts. It includes several other different types of investments that are deemed accounts for FBAR purposes — such as foreign pension and foreign life insurance policies that have a surrender/cash value.

Who has to file the FBAR?

The FBAR is required to be filed by individuals and entities that are considered US persons. The term US persons is a defined term and it is not limited to just ‘people.’ Rather, it includes US corporations, partnerships, trusts, and other entities. One common misconception about FBAR filing is that only taxpayers who reside in the United States are required to file the FBAR but that is incorrect. Even if a US person resides overseas (such as U.S. Expats) or is a foreign citizen with U.S. Person status (living in the US or abroad), they are still required to file the FBAR. There is currently some pending litigation on the issue of whether when a person makes a treaty election to be treated as a foreign person for U.S. tax purposes if the reporting still applies. The IRS takes the position that it does, but that is currently up for debate.

When is the FBAR Due?

Currently, the FBAR form is due to be filed by April 15th of each year. But, for the past several years the F bar has been on automatic extension. That means that taxpayers have until October to file the FBAR form. Taxpayers do not have to file any specific extension form such as a 4868 or 7004, because the FBAR filing due date is on automatic extension. This automatic extension does not apply to other international information reporting forms such as forms 8938, 5471, or 3520.

Which Foreign Accounts do I Report?

All different types of foreign bank and other financial accounts are reportable for the FBAR. Some of the more common types of account reporting include bank accounts, certificates of deposit or fixed deposits, securities accounts, personal pension plans, employment pension plans, life insurance policies, and pooled funds (whether they are in an account or not) such as mutual funds and ETFs.

As provided by the IRS in Publication 5569:

Financial accounts include:

• • • Bank accounts such as savings and checking accounts, and time deposits,

    • 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), and;

    • Any other accounts maintained in a foreign financial institution or with a person performing the services of a financial institution.

      • Example: 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.

What Are Some Common FBAR Mistakes To Avoid?

There are many different types of mistakes that taxpayers make when filing the FBAR, but in general, these mistakes are not fatal and can be resolved painlessly. Some of the more common types of mistakes include:

• • • Not reporting zero balance accounts

    • Not reporting dormant accounts

    • Not reporting accounts of which the taxpayer has signature authority but not ownership.

    • Excluding accounts that do not generate income

    • Excluding accounts that were opened before the person became a US person

    • Failing to file the form simply because the taxpayer does not have all of the information necessary.

What are the Penalties For Missed or Incomplete FBAR?

FBAR penalties tend to fall into three different categories:

Non-Willful FBAR Penalties

The penalties for failing to file the FBAR vary extensively based on whether it was a civil or criminal violation and if it is a civil violation — whether it is willful or non-willful. As mentioned above, based on the new Supreme Court ruling in the case of Bittner, the IRS is limited to issuing a $10,000 penalty per year. The statute of limitations for the FBAR is typically six years, which means the maximum non-willful penalty per person can be $60,000 — noting, that the $10,000 penalty adjusts for inflation. The IRS has made it known that penalties are not limited to a per account penalty, per person, but rather a per person penalty. In other words, if three different people own an account and only one person files the FBAR, the other two individuals can be subject to penalties. Likewise, one person may be subject to a willful penalty, while the other person could be subject to a non-willful penalty — for the same account

Willful FBAR Penalties

If instead, the taxpayer is willful, the penalties can reach upwards of 50% value of the maximum value of the accounts, up to a 100% penalty in the compliance period (previously, it was up to 300% value, which represents six years of FBAR at 50% penalty.) Whether the penalty is willful or non-willful, taxpayers can try to mitigate the penalty, although based on the ‘soon-to-be’ updated version of the Internal Revenue Manual (IRS Memo 2023), the mitigation factors will be removed — although agents will have some discretion.

Criminal FBAR Penalties

With criminal penalties, taxpayers can be subject to both high fines and incarceration. In general, criminal FBAR penalties are relatively rare and tend to only happen in situations in which the taxpayer has violated other crimes as well such as tax evasion, tax fraud, money laundering, structuring, and smurfing.

Reasonable Cause Avoids FBAR Penalties

Another important concept to remember is that non-willfulness is not the same as reasonable cause. If a person is able to show that they acted with reasonable cause, they may be able to avoid all FBAR-related penalties, because when a person acts with reasonable cause, penalties should not issue — or if they have been issued should be abated.

US Persons vs Non-US Persons and Treaty Election Case

As set forth in IRS Publication 5569 (for easy reference), the IRS takes the position that when a person makes a treaty election to be treated as a foreign person, it does not negate their FBAR filing requirement. Currently, there is a recent case that is challenging that position and the case is referred to as Aroeste, which involves treaty elections and FBAR filing requirements.

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.