The Report of Foreign Bank and Financial Accounts (FinCEN Form 114) commonly called the FBAR is a crucial reporting requirement for U.S. persons with foreign financial accounts. With the deadline for the 2023 FBAR set for October 15, now is an excellent time to review the basics and ensure compliance.
Frequent misunderstandings about FBAR filing duties arise because the rules are complicated and full of eye-openers. The surprises range from who must report accounts they do not own, to what may be treated as a “foreign financial account” for FBAR purposes. This article demystifies the subject.
What Is FBAR?
The FBAR must be filed by U.S. persons who have “a financial interest in”, or “signature authority over”, foreign financial accounts exceeding $10,000 in aggregate maximum value during the calendar year. Calculating this aggregate maximum value requires various steps, including converting foreign currency to U.S. dollars using the U.S. Treasury foreign exchange rate as of the last day of the calendar year for which the FBAR is being filed.
The FBAR is not filed with the IRS but is submitted electronically to the Financial Crimes Enforcement Network (FinCEN), another division of the U.S. Treasury.
Financial Interest vs. Signature Authority
Financial Interest: This is a very nuanced definition with far-reaching implications. Generally, a U.S. person has a financial interest in a foreign account if they own or partially own the account or have legal title over the account even if they do not own it. A common example of such a nominee arrangement is when an adult child holds title to a bank account for an elderly parent. Nominee arrangements should be very carefully handled to avoid U.S. tax and FBAR problems.
The concept of having a financial interest also extends to indirect interests in the account, such as through ownership in an entity. For example, if a U.S. person owns more than 50% of a corporation or partnership that holds a foreign account, that person is deemed to have a financial interest in the account owned by the entity and FBAR duties may arise. Even trust founders or beneficiaries can have a financial interest in foreign accounts owned by the trust.
Signature Authority: Signature authority means that a U.S. person has the legal authority to control the disposition of assets in a foreign financial account. This can be done individually or in conjunction with others. For instance, if the person has the ability to transfer or withdraw money from an account or authorize a transaction (even through an online platform with a password), they are considered to have signature authority. The person may not own the account or have a direct financial interest, but simply having the power to control transactions is enough to trigger an FBAR reporting requirement. Having a power of attorney might give the power holder such signature authority.
Who Must File?
U.S. citizens, green card holders, and individuals who meet the substantial presence test, can be required to file FBAR. U.S. entities such as U.S. corporations, partnerships, estates and trusts, also have FBAR filing duties. Significantly, U.S. LLCs with a single member (which are disregarded as separate entities), are responsible for filing FBAR even when the member is a nonresident alien individual.
Children with foreign accounts must file, with a parent or guardian responsible for filing if the child cannot do so.
A nonresident alien individual who makes a special election to file a U.S. income tax return jointly with their U.S. spouse does not need to file FBAR.
A very recent and ground-breaking court case held that use of a treaty tie-breaker clause by a green card holder living in a foreign country can be an escape hatch from FBAR filing duties.
What Counts As A Foreign Financial Account?
Reportable foreign accounts include bank accounts, securities accounts, and accounts held in commingled funds such as mutual funds. Additionally, foreign pension plans and foreign life insurance or annuity contracts with a cash surrender value must be reported. However, foreign investments such as bonds, notes, or stock certificates are not considered accounts unless these assets are held in a foreign brokerage account.
It’s important to note that FBAR reporting applies to accounts physically located outside the U.S. A bank account with a Swiss bank in New York is not considered foreign, but an account in a foreign branch of a U.S. bank is.
Areas of Common Confusion
Several misconceptions about FBAR can lead to compliance issues:
Aggregate Value: Some mistakenly believe that accounts under $10,000 do not need to be reported. If the highest total value of all of the foreign accounts on any day in the year is over $10,000, then each and every account must be reported on the FBAR, regardless of individual balances.
Misunderstanding Account Types: Not all foreign financial assets are reportable. Foreign social security accounts are generally not reportable, but foreign pensions and mutual funds usually are. Get proper advice by an experienced professional in determining whether an account is subject to FBAR reporting.
Schedule B: U.S. persons filing Form 1040 must check a box on Part III of Schedule B indicating whether they have an interest in or signature authority over any foreign accounts. This simple box can trigger further scrutiny if not answered correctly, so be sure it’s accurate.
Filing Deadline: While the standard FBAR deadline is April 15, U.S. persons living abroad are given until June 15. Fortunately, an automatic extension is available until October 15 for all filers, so no formal request is needed for extra time.
Conclusion
FBAR compliance is essential for any U.S. person with foreign financial accounts. With penalties for non-compliance being severe, understanding who must file, what accounts are reportable, and ensuring that all deadlines are met is critical. The October 15 deadline for 2023 FBAR filing is approaching, making now the perfect time to review your foreign financial interests and stay on top of these reporting requirements.
I help with tax matters around the globe.
Reach me at vljeker@us-taxes.org
Check my website: www.us-tax.org
Read the full article here
