A Tax Guide to Annual FBAR Reporting of Foreign Accounts

A Tax Guide to Annual FBAR Reporting of Foreign Accounts

FBAR Reporting of Foreign Accounts

One of the most common questions we receive as international tax lawyers specializing in offshore disclosure and compliance is about the infamous FBAR reporting requirements. The FBAR refers to foreign bank and financial account reporting. From a technical standpoint, the FBAR is filed (electronically) with the U.S. government each year using FinCEN Form 114. It is used to report foreign bank and financial accounts, such as bank account accounts, investment accounts, stock accounts, pension plans, and life insurance policies. The FBAR form has been around for over 50 years but only for the past 20 years has the IRS been the primary organization empowered to enforce compliance and penalties. While oftentimes, the FBAR is referred to in the same breath as FATCA (Foreign Account Tax Compliance Act), the latter has only been around for less than 15 years whereas the FBAR has been around for more than half a century. Our team has written countless articles on all aspects of FBAR filing, reporting, late filing, penalties, and amnesty. Still, recently we have found that many law firms have been using fear-mongering and scaremongering tactics to make taxpayers believe that simple noncompliance may lead to willful penalties and even prison, which is not the case. We recently prepared an article explaining how criminal investigations work involving foreign account reporting, but let’s take a step back and explain some of the basics of FBAR reporting using examples.

First, Who Has to File?

The FBAR is required to be filed by U.S. persons. When it comes to individuals, U.S. persons typically include U.S. citizens, lawful permanent residents, and foreign nationals who meet the substantial presence test. But, from a legal perspective, the term U.S. person is not limited to individuals and can also include trusts, businesses, and other entities. U.S. Person Taxpayers are required to file the FBAR even if they are not required to file a tax return in the current year, as long as they qualify as U.S. persons. If they are a U.S. person for part of the year, then the values they report may be limited based on the portion of the year they are considered a U.S. person, they are still required to follow the form unless an exception, exclusion, or other limitation applies.

What is Reported? 

Taxpayers are required to file Form 8938 to report their foreign financial accounts in any year where the annual aggregate of their accounts combined total exceeds more than $10,000 on any given day of the year. The most important takeaway from the prior statement is that it does not have to be $10,000 per account. Rather, even if the taxpayer has nineteen bank accounts with $1,000 in each account, the taxpayer is required to file the FBAR to report all 19 accounts even though none of the accounts are above $10,000 because the annual aggregate total of all the accounts combined exceeds $10,000.

Let’s look at some common examples:

What Types of Foreign Accounts are Reported?

All different types of foreign financial accounts are reportable. It is not limited to just bank accounts although often taxpayers may be under the impression that it only involves bank accounts, but that is not correct.

For each example, presume that the filer is a U.S. Person.

Foreign Bank Accounts Example

Bob has nine bank accounts in three different countries with a total of $600,000. Two of the accounts are dormant, and three of the accounts have a zero balance and have not been used for many years. Even though only four of none of the accounts are technically active, Bob would still report all nine accounts on the FBAR (and Form 8938).

Foreign Investment Account Example

Linda previously lived in a foreign country and has a securities account with $300,000 in it. Within the account there are several different types of stocks, but no mutual funds or other foreign pooled funds. Linda is required to report this investment account on her FBAR (and Form 8938).

Foreign Stock Certificate

Louise has three foreign stocks worth $400,000. She does not have these stocks in an account but rather owns the certificates directly from each company. Since Louise does not have a foreign account, the ownership of the stock certificates is not reportable on the FBAR — although it is reportable on Form 8938 (FATCA).

Foreign Mutual Fund Accounts

Gene has several mutual funds in a foreign mutual fund account worth $800,000. Even though there are many different mutual funds in the foreign account, generally when it comes to FBAR reporting, Gene can usually report the main account with the total value of all the funds combined. Noting, that for tax return purposes, Gene would have to parse out each fund for Form 8621 reporting purposes.

Foreign Pension/Retirement Example

Tina has two foreign pension plans in different countries for a total value of $700,000. One of the pensions is an employment pension and the other pension is a personal pension. Generally, both of the pensions would be reportable on the FBAR (and Form 8938). Since the pension plans are considered to be trusts, Tina may have to report the pensions on Form 3520 and 3520-Aunless the retirement/pension qualifies as a tax-favored retirement or non-retirement trust under Revenue Procedure 2020-17, along with the 2024 Proposed Foreign Trust Regulations.

Foreign Life Insurance Example

Millie has a foreign life insurance policy with a surrender value of $900,000. Millie is required to report the insurance policy on the FBAR (and Form 8938). Saint Millie is currently also paying premiums on the life insurance policy, she may have an excise tax issue and have to file Form 720 and pay 1% tax on the premiums.

When is the FBAR Due?

The FBAR iis currently due on April 15th but is on automatic extension so taxpayers audit completely have until October to file the form. The form is filed directly on the FinCEN website.

FBAR Exceptions

While there are not many exceptions for individuals with foreign accounts, there are some exceptions to filing the FBAR. For taxpayers who think they may qualify for one of the exceptions will want to carefully work through the information and instructions provided by the Internal Revenue Service and FinCEN.

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 who 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.