IRS FBAR – FAQ Question & Answer Summary by International Tax Lawyers
With thousands of Foreign Financial Institutions (FFIs) agreeing to report US taxpayer financial accounts under FATCA, if you have not filed an IRS FBAR (Report of Foreign Bank and Financial Accounts) statement in the current prior tax year (or prior years) you should be very careful.
That is because the failure to file timely FBAR reports can result in extremely high penalties, that depending on the facts and circumstances of your case could reach 100% value of the foreign accounts.
In addition, the IRS has the authority to penalize you for unreported taxes on the foreign income the accounting earned (even if the passive income goes on tax in the foreign country), as well as fines, penalties and possible criminal investigation.
Moreover, if you have a Foreign Pension, Foreign Retirement Account, or Foreign Life Insurance or Life “Assurance” policy that generates “Bonus” you could also be subject to very stiff penalties.
The following is a summary of IRS FBAR reporting rules:
Golding & Golding are highly-respected International Tax Lawyers and FBAR (Report of Foreign Bank and Financial Account) Lawyers who have represented hundreds of individuals and businesses with FBAR compliance related issues in accordance with IRS and DOT rules and regulations.
Many unscrupulous law firms, CPAs and Lawyer/CPAs are providing the public with misinformation about the FBAR form in order to try and scare them into retaining these firms for FBAR representation, only to be left in a worse position than when they started.
Unfortunately, many people and businesses are getting into trouble because they relied upon a tax professional who was misinformed about international tax law or FBAR related experience. They use marketing and advertising ploys to instill fear in potential client – only to get the client in a serious bind with the federal government because they did not understand what is required to be included in the FBAR Filing.
We are providing you with a Free Summary of the common Frequently Asked Questions regarding questions we have received over the years. (While FATCA is a a relatively new law, the FBAR has been in place for nearly 50 years). Even though The FBAR form itself has a set of instructions and frequently asked questions (FAQ) section, our Frequently Asked Question list is more of “FAQs from the trenches,” in which we will answer questions which are not really provided for by the government.
To learn more about related issues such as the Streamlined Program or OVDP, please click those links for additional FAQ pages.
What is an FBAR Statement?
An FBAR statement is a Report of Foreign Bank and Financial Accounts form. It is electronically filed annually with the Department of the Treasury online. Before this year (2016) the form had to be filed no later than June 30th of the current tax year in order to report the accounts for the prior tax year (File in 2015 to report the 2014 Maximum Account Balances). The law is changing in 2016 which will be applicable in 2017, and will have an April 15th, 2017 due date.
Is it more than $10,000 per account, or in Total?
An FBAR is required to be filed when a person or business (explained below) has an annual aggregate total of foreign accounts that exceeds $10,000 on any day throughout the year. It does not matter if all that money is in one account or if a person had 11 accounts with $1000.00 in each account (you get the picture, right?). Once your overseas foreign accounts exceed $10,000, it is now time to report all of the foreign accounts.
You are required to report the maximum balance throughout the year. If you do not have the maximum balance available, you can mark the box that notes the Max balance is unavailable — or alternatively you can use the best value have and then note that on the FBAR.
What if the Money is not mine?
Even if the money is not yours, but you have signature authority over the foreign account – you are required to report the account on the FBAR. This also includes accounts in which you are a joint account holder but the money is not yours – it still must be reported.
Who or What is a U.S. Taxpayer?
This question can get more and more complex depending on who you speak to and what the context of the question is. To that end, if you are either a U.S. citizen, Legal Permanent Resident, or Foreign National Subject to US tax such as a visa holder (if you meet the Substantial Presence Test), then you should most likely file the annual FBAR form.
*If you are unsure whether you should file the form or not, you should speak with an experienced International Tax Lawyer to evaluate your particular situation.
I Live Overseas, Does that Matter?
Unlike a FATCA Form 8938 — which is similar to the FBAR — the requirements for filing the FBAR do not change solely because you live overseas. In other words, if you still meet the requirements for having to file a tax return (even if you do not have to file a tax return because you did not meet the minimum threshold requirements for earning income sufficient to file a tax return) you still have to file the FBAR – no matter where you live.
I Relinquished my Green Card/Legal Permanent Residency
Unfortunately, just because you relinquished your green card does not mean you are exempt from filing an FBAR. If you are considered a long-term resident of the United States and/or meet the substantial presence test you may still be responsible for filing an annual FBAR statement.
*You should speak with an experienced FBAR lawyer to discuss this in more detail.
I did Not have to File a Tax Return?
This can also get confusing, but it is important to remember that the FBAR is not filed with your tax return. Rather, while your tax return is filed directly with the Internal Revenue Service (by mail or online), your FBAR is filed online electronically directly with the Department of Treasury. Even if you do not meet the threshold requirements for filing a tax return, if your annual foreign account balances exceed $10,000, you should still file the FBAR.
The Money in the Foreign Accounts is not Mine?
This is not unusual. It is very common in foreign countries to have children or other individuals with a Power of Attorney over another person’s account – even when the money does not belong to the POA holder. To that end, if a person’s name is on the account, they should still file an FBAR statement. There is a section of the FBAR reserved for individuals who have signatory authority or other type of authority on the account, but the money is not theirs.
I do not want to Report my Foreign Parents’ Name on the FBAR
We understand the importance of privacy. Generally, there are ways around reporting the information the FBAR where you disclose certain information but not all the requested information (while still being FBAR compliant).
The Money is from an Inheritance
It is important to remember that the FBAR is a reporting form. In other words, the Department of Treasury wants to know whether you have the money overseas — so that the DOT can track it. The source of the money is less important to the degree that the Department of Treasury does not really care whether you received it from an inheritance, whether you earned it overseas, or whether you have full access to that money at the current time – for FBAR purposes at least. Rather, they just want to know where the money is being held in whose name is associated with the account.
Thus, even if the money was inherited, you are required to report the account information on the FBAR. If you fail to do so and get stuck in the IRS/DOT crosshairs as a result of the foreign financial institution reporting the account in accordance with FATCA, it will be much harder to explain the situation at that time versus simply filing the FBAR timely or entering into OVDP or the Streamlined Program.
**That does not mean you should file a late FBAR without entering one of the approved programs (please see below).
My Accounts are in the name of a Foreign Corporation
This is where the FBAR starts to get more complicated. The most important thing to remember is the concept of the FBAR is to promote financial transparency. Therefore, it does not really matter how you structure the business, if in the end the money is yours, then you should file the FBAR.
This can be distinguished from a company in which you are merely an employee and have signatory authority, which would require a comprehensive analysis of the business and your rights to the business and money before determining whether you should file.
My Name is not on the Company…But I “Own” The Company
We get it. You opened the company offshore using other people’s names. In other words, even though your name is not directly on the corporate documents or other documents required to form the business in the foreign jurisdiction of choice…the money is yours.
This is the type of situation in which you should speak with an experienced FBAR lawyer before taking any action. Why? Because while technically the money is not yours to the degree that your name is not on the company, if the IRS or US government was to pierce the corporate veil and learn of your ownership (whether in fact or implied) you may be looking at tax evasion and tax fraud charges.
Alternatively, by claiming interest or ownership of the account in which your name is not directly associated may also open a Pandora’s box. This is the type of situation which may be best remedied through an offshore disclosure program – which is why you should wait to take any action before speaking directly with an experienced offshore disclosure lawyer
My Accounts are in the name of a Foreign Holding Corporation
It does not matter that the accounts are in a Foreign Holding Corporation – this is not sufficient to avoid filing the FBAR statement. Otherwise, a US taxpayer could simply open a BVI Holding Corp and put the holding Corp. as the owner of the account and thus not to have the file the FBAR – even though all of the account money belongs to the US taxpayer – which is directly contradictory to the purpose of the FBAR.
If you are the “true owner” of the money, then filing the FBAR is technically required.
My Accounts are in the name of a Foreign PFIC Corporation
The same thing goes for a Passive Foreign Investment Company. Depending on which country you are in and how the country titles the foreign company, these companies come in all shapes and sizes. Back in the 80s, they were used primarily to avoid detection by the United States government of foreign account and asset information. There is no exception to filing an FBAR simply because you transferred your money into the PFIC.
My Accounts are in the name of a Foreign Trust
As you can imagine, foreign trusts are not immune from having to file an FBAR statement either – in addition to possibly having to file a 3520 and 3520A. Whether the purpose of the foreign trust was “harmless,” and/or you thought you could avoid U.S. detection or possibly to form the foreign credit shelter trust or foreign asset protection, a foreign trust does will not negate your requirement to file an FBAR. If the accounts are in a foreign trust, in which you are the owner of the foreign trust then you have to report the account on the FBAR.
What Types of Accounts must be Reported on an FBAR?
Essentially, any account that is maintained at a foreign financial institution must be reported on the FBAR – but this does not mean every income generating asset has to be included. Here’s an example: if you have a Foreign Bank Account at a Foreign Financial Institution it has to be reported on the FBAR. Conversely, if you have a foreign rental property that is earning foreign rental income, while the foreign rental income must be reported on your tax return, and the account in which the income that is generated is placed into must be reported (assuming you otherwise meet the FBAR filing requirements) — the home itself does need not be reported on the FBAR.
Do I have to report my Life Insurance Policy?
This is another complex area of the FBAR. Essentially, if the life insurance policy (or life assurance policy as it is called in many countries) has a surrender value or sale value insofar as you could sell the policy on the open market – it should most likely be reported on the FBAR.
In situations like this where there is a reporting requirement, it is better to err on the side of caution.
Reporting on the FBAR vs. Paying Tax on the Money
This is a question we receive often, and so a distinction must be made. Just because you are reporting a foreign account on an FBAR does not mean there is a taxable event taking place. For example, the money may have been inherited, received as a gift and/or earned with income tax already having been paid on the earnings.
Thus, the key issue to remember with an FBAR is that the FBAR is a reporting requirement for you to update the Department of Treasury with your foreign accounts that you maintain overseas; it has nothing to do with whether there is a taxable event taking place.
Remember, the FBAR is a “Reporting” requirement for purposes of “Disclosure.”
I do not know my Maximum Account Value?
When you are reporting on the FBAR, you are supposed to provide the maximum value of the account balance for the year. Depending on which country you are in, and whether the account provides you statements (or if it is a passbook account) that information may not be readily available. When that information is not available, you may either click the box that reads maximum account balance unknown or you may also consider using the balance that you have available, and explaining why you cannot obtain the maximum value in the box provided on the first page of the FBAR.
Can If I file a Late FBAR Statement?
This is a very complex issue. Technically, you are not allowed to file a late FBAR statement. There is some exception for direct filings in situation where there is no unreported income. Other people submit a Quiet Disclosure (in which they secretly file prior FBARs and amended tax returns) which can result in extremely high fines and penalties.
The Internal Revenue Service a Department of Treasury are taking foreign account compliance very seriously and it is a major priority for the IRS. If you have not filed your FBAR statements, you have three main alternatives: Reasonable Cause Statement, Streamlined Disclosure, or OVDP (these are briefly discussed below)
Late FBAR Filings and a Reasonable Cause Statement
If you have not filed your FBAR timely, the first option is to submit the FBAR late accompanied by a Reasonable Cause Statement. The failure to file an FBAR can have extremely high penalties. Therefore, if you opt for the reasonable cause statement as opposed to one of the approved programs discussed below, then you are essentially submitting the account information and asking for forgiveness from the IRS for any penalty.
Two things to keep in mind his first, the IRS is not very sympathetic, and second, if the IRS disagrees with your reasoning — you have now disclosed all of your account information to the IRS with no protection from penalties or criminal investigation.
For more information about Reasonable Cause, please Click Here for a summary provided by Golding & Golding.
Late FBAR Filings and the Streamlined Program
Under the streamlined program, a person will amend their tax returns for three (3) years as well as file six (6) years of unreported past FBAR statements (assuming that they are a U.S. taxpayer for six years; if they have only been a US taxpayer for four (4) years they would only file four (4) years of past FBAR statements). This program is reserved for taxpayers who were non-willful (in other words, they were unaware of the requirement to file FBAR and report their foreign income).
For more information about the Streamlined Program, please Click Here for a summary provided by Golding & Golding.
Late FBAR Filings and OVDP
OVDP is the Offshore Voluntary Disclosure Program. It is a program designed for individuals, businesses and trusts that knowingly intentionally failed to report their foreign account information and foreign income earnings. The program requires the applicant to file eight (8) years of past FBAR statements along with eight years of original and/or amended tax returns.
For more information about OVDP, please click here for a summary provided by Golding & Golding.
Is the FBAR the same as an 8938 form?
No. While the forms are similar, they do have key differences. The 8938 (Statement of Specified Foreign Financial Assets) is filed with your tax return and has different threshold requirements (much higher than the $10,000+ for an FBAR), which will be dependent on whether the taxpayers are filing married filing jointly, married filing separate, single — as well as whether they reside in the United States or overseas.
Call Now, We Can Help.