Editor’s note: This is a guest commentary is contributed by Aprio LLP, formerly HA&W, an advisory firm with capabilities in 25 languages and clients in 40 countries.
Do you hold or control assets in an overseas account? If so, filing a Report of Foreign Bank and Financial Accounts (FBAR) might be in your future.
FBAR filing requirements catch some taxpayers off guard. Many think the law is intended only for jet-setting billionaires — or merely overlook the fine print. But failure to file the form can result in strict penalties: up to $10,000 if it was inadvertent or $100,000 (or half of the account balances, whichever is greater) if it was willful.
Even if you don’t consider yourself wealthy, these filing requirements could still apply to you. But by understanding the fundamentals and the fine print of FBAR filing requirements, you will avoid any taxing surprises.
FBAR Filing Fundamentals
The FBAR was created by the Foreign Account Tax Compliance Act in 2010, and it is the common name for IRS Form 114. The form is filed independently of your regular income tax filing, and it must be filed electronically.
According to the IRS, persons in the United States are required to file an FBAR if they meet the following criteria:
- The person had a financial interest in or signature authority over at least one financial account located outside of the U.S, and
- The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported.
The Fine Print
Understanding the details of these criteria will help you determine whether you’re covered by FBAR filing requirements.
In IRS parlance, the term “person” isn’t limited to humans. In addition to U.S. citizens and residents, this also includes corporations, partnerships, and limited liability companies that are created or organized in the United States or under U.S. laws. It can also include trusts or estates formed under the laws of the U.S.
The term “financial account” isn’t limited to bank accounts. It also includes various other assets, most commonly brokerage accounts and life insurance with cash value, such as permanent life insurance policies.
Children who satisfy filing requirements based on the sums involved and their legal status need to file their own FBAR — even if their personal income is too low for them to file a tax return. (This means transferring a foreign account to your child’s name does not eliminate FBAR filing requirements.)
A Word on the Calendar
Make a note of the “at any time during the calendar year” language. The question is: What was in your account on any date of the year, even if the balance only hits $10,000 for a single day. It also doesn’t matter whether the account was closed at some point during the year, so long as it existed on the first day of the year.
“Signatory authority” isn’t the same thing as owning the assets in an account. If you hold that status in a foreign account, possibly by being an officer of a corporation that has such an account, you’ll need to file an FBAR.
And filing a Form 8938, Statement of Specified Foreign Assets, with your personal tax return doesn’t remove your obligation to file an FBAR where personally owned assets are concerned. Note though that if the assets involved are those which you own through controlled foreign entities, you only need to report them on Form FBAR and not on Form 8938.
The fine print can be tricky to navigate, and the penalties for nondisclosure of foreign accounts can be stiff.
Reach out to a CPA-led financial advisory firm, which will help you determine if the requirements apply to you or explore your options if foreign accounts were not reported in the past (such as Streamline Filing compliance).
Understanding the fundamentals and the fine print of FBAR filing requirements will help you avoid being caught off guard — even if you do not consider yourself wealthy.
About the author: Olga Bardina is a tax senior manager servicing technology, distribution at international clients at Aprio. She has been with the firm since 2010. She has master’s degrees in accounting and comparative literature from the University of Florida and Emory University, respectively, and earned a diploma in linguistics from Moscow State University. Contact her at email@example.com.