If you are a U.S. person and have one or more financial accounts outside the United States, you may be required to disclose these accounts to the government. You do this by filing the Foreign Bank Account Report, also known as FBAR.
Understanding the rules around this requirement is of extreme importance as failing to comply can subject you to hefty penalties.
What is FBAR?
The Bank Secrecy Act (BSA) instituted the Foreign Bank Account Report in an effort to combat tax evasion and other illegal activities involving foreign bank accounts. This provision requires U.S. persons to file FinCEN Form 114 if the value of foreign accounts exceeds a certain threshold during the calendar year.
Note that the FBAR is simply a disclosure form. You are not taxed on the reported account values.
Who Must File?
All U.S. persons that own or have a financial interest or signature authority over one or more foreign financial accounts must file an FBAR if the aggregate maximum value of the accounts exceeds $10,000 during the calendar year.
Pay special attention to the term “maximum aggregate value”. You have to calculate the maximum value of each foreign account and add them together. If the resulting value is greater than $10,000, you have a reporting requirement. This applies even if none of the accounts, individually, exceed $10,000.
In fact, you don’t even need to actually have more than $10,000 available in order to meet the requirement. Let’s assume you have two accounts, A and B:
Account A has $6,000 in it, and account B has $1,000. Sometime during the year, you transfer $5,000 from account A to account B. You end up with $1,000 in account A and $6,000 in account B. Now, the maximum value during the calendar year is $6,000 for both accounts. The aggregate maximum value is $12,000. You must file an FBAR even though you only actually have $6,000 available to you.
How do I Calculate the Maximum Account Value?
According to the Department of the Treasury, the maximum account value is “a reasonable approximation of the greatest value of currency or nonmonetary assets in the account during the calendar year“. You can use periodic statements to help you with this.
Use the following steps to determine the maximum value to be reported on the FBAR:
- Determine the maximum account value in the currency of the account;
- Convert value to U.S. dollars using the exchange rate of the last day of the calendar year;
- Round it up to the nearest dollar (for example, $5000.23 would become $5001);
- If the resulting value is a negative number, use $0.00 as the maximum value.
Use the Treasury Reporting Rates of Exchange to find the exchange rate of the last day of the calendar year. You can use other verifiable exchange rates if no official rate is available. In this case, you must provide the source of the rate used. For accounts denominated in U.S. dollars, it is not necessary to apply any currency conversion.
You must apply the steps above to each foreign account, individually. Then, sum the individual maximum values to calculate the aggregate maximum value.
What Financial Accounts do I Have to Disclose?
The most obvious financial accounts that you must disclose are foreign bank accounts. However, the definition is much broader and includes the following:
- Checking and savings account;
- Brokerage account;
- Certificate of Deposit;
- Commodity futures or options account;
- Insurance policy with cash value, such as whole life insurance policy;
- Annuity policy with cash value;
- Shares in a mutual fund or similar pooled fund.
- Online gambling account;
- Crypto platforms;
- Online accounts such as PayPal.
Please note that the list above is not exhaustive. You must disclose all accounts, of any type, maintained with a foreign financial institution. Individual bonds, notes, and stock certificates held directly by the filer are not considered financial accounts. Therefore, you don’t have to disclose these.
Keep in mind that if you meet the reporting requirement, you must report ALL foreign accounts. Even those with a maximum value of $0.00.
What is a Foreign Financial Account?
In general, a financial account is considered a foreign financial account if it is maintained with a financial institution physically located outside of the United States, its territories, and possessions.
For example, an account held with a branch of a U.S. bank that’s physically located in Brazil is a foreign financial account. Conversely, an account held with a branch of a Brazilian bank that’s physically located in the U.S. is not a foreign financial account.
How do I file an FBAR?
The FinCEN Form 114 (FBAR) is separate from your tax return. You file it directly with the Department of the Treasury, not the IRS. The process is simple but you need to gather some information about your accounts, such as:
- Name of the financial institution;
- Account number, or other designation;
- Complete address of the financial institution;
- Maximum account value.
With the information in hand, visit the BSA E-Filing System and search for the File FBAR option. You can either use their online form or download a PDF file for you to complete offline. If you opt to use their online form, gather all necessary information before you start as you can’t save your progress and continue later.
Make sure to download a copy of the completed form as well as the submission confirmation page. You will need to keep these for your records.
Can I File Jointly With My Spouse?
In general, if two or more persons jointly own an account, each person must file an FBAR, individually. Each person must also report the entire value of such accounts.
However, spouses can jointly file a single FBAR if they meet the criteria below:
- ALL accounts the non-filing spouse is required to report on an FBAR are jointly owned with the filing spouse; and
- You are filing the FBAR on time, before the deadline;
Only one person can sign an FBAR. Therefore, spouses must also complete and sign a Record of Authorization to Electronically File FBARs (Form 114a). This form is only for your personal records and you should not file it with the FBAR.
How do I File an FBAR For a Minor Child?
Children, including minors, are not exempt from filing an FBAR. A child is responsible for filing their own FBAR unless they can’t for any reason, such as age. In this case, the parent or legal guardian must file it for the child.
The parent or legal guardian must enter “Parent/Guardian filing for child” on “Item 45 – Filer title” when signing an FBAR on behalf of a child.
Can I Amend an FBAR?
The short answer is yes. To amend an FBAR you have to file a new, and complete, form. You must also check the “Amended” checkbox and enter the BSA identifier of the original FBAR into the “Prior Report BSA Identifier” field. Amending an FBAR is a lot more complicated than it sounds though. That’s because there could be severe penalties involved.
If you just made a small mistake and quickly noticed it, then it might be OK to simply file an amendment. I have done that myself in the past. It was a pretty simple mistake and I amended it before the original deadline.
On the other hand, if you forgot to disclose multiple accounts, severely understated the value of such accounts, and/or have unreported income from these accounts, then simply filing an amended FBAR is probably not an option. You will most likely have to join one of the voluntary disclosure programs offered by the government.
Always consult with a licensed tax professional before filing an amended FBAR.
What Is the FBAR Deadline?
You must file the FBAR by April 15th of the following year in which you had a reporting requirement. For example, the FBAR for 2020 is due on April 15th, 2021.
Can I Request an Extension?
The due date is automatically extended to October 15th if you fail to file before the original deadline. You don’t have to request an extension.
What Are the Penalties for Not Filing?
Failing to comply with the FBAR requirements comes with hefty penalties. The actual monetary value of the penalties varies depending on the circumstances and are adjusted for inflation annually.
If your failure to file was non-willful, the penalty can be up to $12,921 per violation. The IRS will sometimes waive the penalty if you have reasonable cause for not filing your report, and you don’t have any unreported income from these accounts.
The penalties get much harsher if your act was willful, meaning, you knowingly failed to file. The penalty, in this case, is up to the greatest of $129,210 or 50% of the unreported amount, per violation. You could also face criminal charges and potentially find yourself behind bars.
What Does per Violation Mean?
In general, a single violation means failing to report 1 account in a given year. Following this logic, failing to report 3 accounts for 2 years is considered 6 violations.
While the IRS will apply this rule for both willful and non-willful violations, there’s a recent case where a court ruled that, for non-willful cases only, failing to report an FBAR is considered a single violation per form, regardless of the number of accounts in it.
This is a new development and I would not expect the IRS to acknowledge this ruling and update its internal procedures anytime soon, if ever. So, do yourself a favor and file your FBAR(s).
I Did Not File. What Do I Do Now?
Before you do anything, consult with a licensed tax professional. Failing to file an FBAR is a serious offense. Only a professional can give you advice based on your unique situation. With that out of the way, you have three options to file a late report.
- File late FBARs yourself
You can usually simply file the late FBAR(s) online if you meet all of the following criteria:
- The failure to comply was non-willful; and
- You have reasonable cause for failing to report; and
- You reported on your tax return and paid all taxes on income from all of the foreign accounts being reported in the late FBAR; and
- The IRS hasn’t contacted you about the late FBAR(s) and you are not currently under investigation.
Keep in mind that there’s no guarantee penalties won’t be imposed. The odds are good, though, if you truly acted in good faith.
- Streamlined Filing Compliance Procedures
This option is for taxpayers whose failure to file a report was due to non-willful conduct, but that also did not report on and/or pay tax on the income generated from foreign accounts.
The Streamlined Filing Compliance Procedures allow you to amend your tax return and file your delinquent FBAR(s) while paying a reduced penalty. Depending on your circumstances, you might not pay any penalties at all.
These procedures are very complex. It is best if seek professional help before going through this process.
- Voluntary Disclosure Practice (VDP)
If you willfully failed to file an FBAR or report and pay taxes on income from foreign accounts, your only option is to use the Voluntary Disclosure Practice. This is a new program that replaced the Offshore Voluntary Disclosure Program (OVDP), which was shut down in September 2018.
One of the big differences of the new VDP program is that you don’t get protection against criminal charges anymore. If you ever find yourself in a situation where you need to take part in it, please, lawyer up!
Anything Else I Need to Be Aware Of?
You might also need to file Form 8938 (Statement of Specified Foreign Financial Assets) if you have interest in one or more foreign financial accounts. The reporting threshold is different than the one for the FBAR and you also have to report ownership in certain foreign businesses. Consult with your CPA to determine if you must file this form.