New Foreign Bank and Financial Accounts Reporting Primer

New Foreign Bank and Financial Accounts Reporting Primer

What You Must Know About FBAR Before Filing

While Taxpayers may be required to file many different types of international information reporting forms each year in order to report their foreign accounts, assets, investments, and income — the FBAR (FinCEN Form 114) is the most common and well-known international reporting form. That is because unlike many of the other international reporting forms, the FBAR is not limited to one specific type of asset. For example, when taxpayers report foreign corporations, they will file Form 5471. If they have to report a foreign trust then they will file Form 3520-A, but the FBAR is more general (and more encompassing) than these other forms. It is used to report all different types of foreign financial accounts, such as bank accounts, investment accounts, foreign pension plans, certain life insurance policies, pooled funds (Mutual Funds and ETFs), and more. Let’s go through the most important facts about FBAR filing and reporting in order to help avoid some common mistakes.

The FBAR is Not an IRS Form

The first thing to remember about the FBAR is that it is not an IRS tax form. Technically it is a FinCEN (Financial Crimes Enforcement Network) form. The reason why this is important is that you will not find the FBAR form with your tax preparation documents. Rather, the form is located on the FinCEN website and Taxpayers should download the form from the FinCEN site, complete the form, and then submit it electronically on the FinCEN website as well.

The FBAR is No Longer Due on June 30

Even to this day, there are some tax practitioners who tell their clients the FBAR is due on June 30th. For the past several years, the due date of the FBAR was changed so that the FBAR is no longer due on June 30 — but rather on April 15th. Also, the FBAR has been on automatic extension for the past several years as well, so the due date is actually October — and no extension form needs to be filed.

FBAR is not Limited to Bank Accounts

The FBAR is not limited to just bank accounts (although bank accounts are the most common type of reportable asset). Rather, it includes many different types of foreign financial accounts, such as investment accounts, stock accounts, life insurance policies, and pension plans.

The Threshold is Not $10,000+ Per Account

Each account that is reported on the FBAR does not have to contain more than $10,000. Rather, it is a +$10,000 annual aggregate total of all of the accounts. Therefore, if a Taxpayer had one account with $300,000 and 17 different accounts with under $50 in each of them, the Taxpayer would report all 18 accounts.

FATCA and FBAR are Not the Same Things

FBAR refers to foreign bank and financial account reporting. FATCA refers to the Foreign Account Tax Compliance Act. FATCA has been a filing requirement for taxpayers since 2012 (on the 2011 tax return) and is similar to FBAR (at least for reporting purposes) — but FBAR and FATCA are not the same thing. Depending on the type of accounts or assets that a person has, they may be required to file both forms, and some assets may be listed on both forms as well.

Non-Willful Penalties are Limited under Bittner

In late February 2023, the Supreme Court in the case of Bittner ruled that when it comes to non-willful FBAR penalties (which is the most common type of penalty) the IRS is limited to a per form per year penalty instead of a per account per year penalty. Therefore, penalties are limited to $10,000 per year although the $10,000 adjusts for inflation.

Willful Penalties Are Less Common (and can be Mitigated)

While willfulness FBAR penalties can be much higher and more severe than non-willful penalties, it is also important to note that most Taxpayers are not willful. In fact, the majority of penalties that are assessed are non-willful penalties and even if willful penalties may be assessed, taxpayers have the opportunity to mitigate damages.

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.