Ultimate Guide to IRS FBAR
We serve as external Counsel on all types of IRS Tax Audit defense and compliance matters.Steven Dillon – Former IRS Tax Attorney and Local Counsel
If you are a U.S. citizen or resident and you have funds in offshore accounts, you may be required to file an annual FBAR, and you may owe additional filing obligations to the IRS as well. Learn everything you need to know about reporting offshore accounts and other foreign assets in this ultimate guide.
Under the federal Bank Secrecy Act, the U.S. Treasury Department has the authority to monitor U.S. citizens’ and residents’ financial interests overseas. Pursuant to this authority, the U.S. Treasury Department requires U.S. citizens and residents who have funds in offshore accounts to report these funds to the Financial Crimes Enforcement Network (FinCEN), which is one of its bureaus.
The means for reporting offshore accounts to FinCEN is through the filing of FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). FinCEN has delegated its authority to enforce U.S. citizens’ and residents’ FBAR filing requirements to the Internal Revenue Service (IRS). So, while FBARs must be filed with FinCEN, individuals who fail to file can expect to hear from the IRS.
Importantly, U.S. citizens and residents who have offshore assets may also have an obligation to file a different form, Form 8938, with the IRS under the Foreign Account Tax Compliance Act (FATCA). However, even if you do not need to file Form 8938, you may still be required to file an FBAR. Non-compliance with the Bank Secrecy Act can have significant consequences, so all U.S. citizens and residents who are required to file an FBAR need to make sure they do so accurately and on time.
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The FBAR: What Is It, When Is It Required, and Who Must File?
An Overview of the FBAR Filing Requirement
The FBAR is a federal tax reporting form that is required for most U.S. citizens and residents (and many business entities) that own offshore accounts. The purpose of the FBAR reporting requirement is to help FinCEN and the IRS identify unlawful transactions and efforts to evade U.S. tax liability by holding assets abroad. As explained in the IRS FBAR Reference Guide:
“The FBAR is required because foreign financial institutions may not be subject to the same reporting requirements as domestic financial institutions. The FBAR is also . . . used . . . to identify persons who may be using foreign financial accounts to circumvent United States law. Information contained in FBARs can be used to identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad.”
Notably, while the IRS notes that foreign financial institutions may not be subject to the same reporting requirements as banks in the U.S., many foreign financial institutions do report U.S. citizens’ and residents’ accounts to the IRS in compliance with FATCA. As a result, even if an individual or business does not report its foreign holdings with an FBAR (or Form 8938), the IRS could still very well have access to the information it needs to assess compliance (or lack thereof) and impose penalties under the Bank Secrecy Act and FATCA.
How To Determine if You Need to File an FBAR
There are two basic conditions that determine if an individual or business is required to file an FBAR. These can be referred to as the “identity” condition and the “aggregate maximum value” condition.
1. The Identity Condition
The Bank Secrecy Act’s FBAR filing requirement applies to U.S. citizens living overseas, the substantial majority of people living in the United States, and most businesses in the United States. If you (or your business or other entity) falls into any of the following categories, then you are potentially subject to the FBAR filing requirement:
- U.S. citizens (regardless of country of residence)
- U.S. residents who are foreign citizens
- Corporations, partnerships, and limited liability companies (LLCs) organized in the United States or under U.S. law
- Trusts and estates formed under U.S. law
Importantly, even if an entity is disregarded for federal income tax purposes (i.e. a single-member LLC that passes through all income to the sole owner), it may still be required to file an FBAR. This is due to the fact that FBARs are required under the Bank Secrecy Act and do not relate to, “any provisions of the Internal Revenue Code.”
2. The Aggregate Maximum Value Condition
Individuals and entities that fall into the above categories must file an FBAR for any year that the “aggregate maximum value” of their offshore accounts exceeds $10,000. “Aggregate maximum value” considers the combined value of all accounts owned by a single individual or entity.
For example, if a U.S. citizen owns separate accounts in Switzerland and the British Virgin Islands (BVI) that are each worth $5,000, then that individual must file an FBAR with FinCEN. Likewise, if the values of these accounts are $10,000 and $1,000, respectively, both accounts must still be reported to FinCEN.
While we have used the term “offshore account,” as is common practice, the Bank Secrecy Act uses the term “foreign financial account.” A foreign financial account is any of the following that is located outside of the United States (including at a foreign branch of a U.S. bank):
- Savings or checking account
- Securities account
- Futures or options account
- Mutual fund
- Insurance policy with a cash value
The FBAR filing requirement also applies with respect to funds held in, “[a]ny other accounts maintained in a foreign financial institution or with a person performing the services of a financial institution.” As you can see, exceptions to the FBAR filing requirement are scarce; and, as a result, all individuals and entities that own more than $10,000 held in offshore accounts at any point during a tax year will be well-advised to consult with a federal tax lawyer in order to confirm whether they have to file.
FAQs: What Do U.S. Citizens, Residents, and Businesses Need to Know about FBAR?
For individuals and businesses that are subject to the FBAR filing requirement, it is imperative to have a comprehensive understanding of the Bank Secrecy Act’s requirements, how they compare and contrast with the requirements under FATCA, and what can happen if you fail to meet your filing obligations. Here are answers to some key questions:
Q: When did the obligation to file FBAR forms start?
The obligation to file FBAR forms has been in place since the Bank Secrecy Act was enacted in 1970. The specific form used to file has changed over time, but the requirement to report foreign financial assets to the U.S. government has been in place for decades.
Q: What is an FBAR and how does it relate to federal tax?
An FBAR is a federal form that must be filed with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). Although the FBAR is not strictly a tax form, the IRS enforces taxpayers’ FBAR filing requirements; and, in many cases, the obligation to file an FBAR will trigger an obligation to file IRS Form 8938 as well.
Additionally, in many cases, U.S. citizens, residents, and businesses will owe federal tax obligations arising out of their foreign-derived income and offshore holdings. As a result, the FBAR is a way for the IRS to asses taxpayer compliance, and it provides a means for the IRS to determine when an audit or investigation may be warranted. With that said, failing to file an FBAR (whether intentionally or unintentionally) can lead to substantial penalties on its own, and the IRS will often view a taxpayer’s failure to file as a red flag for a possible attempt to evade federal income tax liability.
Q: Who needs to file an FBAR?
The FBAR filing requirement applies to U.S. citizens, residents, and businesses that have at least $10,000 in assets held in offshore accounts at any point during the applicable tax year. While there are some limited exceptions, all taxpayers that have offshore accounts with an “aggregate maximum value” in excess of $10,000 should assess their FBAR filing obligations. While filing an FBAR is a relatively straightforward process (more on this below), the consequences of failing to file an FBAR when required – and thus violating the federal Bank Secrecy Act – can be substantial.
There are several common misconceptions about the FBAR filing requirement; and, owing in part to the statute’s complexity, there is a lot of misinformation about the Bank Secrecy Act online as well. For example:
- The FBAR filing requirement does not solely apply to U.S. citizens. It applies to “U.S. persons,” which include foreign citizens living in the United States as well as businesses, trusts, and estates organized in the U.S.
- The FBAR filing requirement applies to U.S. citizens living in the United States and abroad. Many expatriates (“expats”) mistakenly believe that they do not need to report their bank accounts to FinCEN. However, regardless of your country of residence, if you are a U.S. citizen, you must report your foreign accounts (with an “aggregate maximum value” in excess of $10,000) with an FBAR.
- Filing IRS Form 8938 does not serve as a substitute for filing an FBAR. Many U.S. taxpayers must file both IRS Form 8938 and an FBAR (FinCEN 114) on an annual basis in order to comply with the Bank Secrecy Act and FATCA.
Q: How do you file an FBAR?
FBAR filing is done online through FinCEN’s Bank Secrecy Act (BSA) E-Filing System. As explained by FinCEN: “Individuals can satisfy their filing obligation by using the no registration option within the E-Filing System. Institutions (including attorneys, CPAs, and enrolled agents), must register with the BSA E-Filing System and obtain a User ID and password in order to file FBARs.”
While individuals can file their FBARs on their own, they also have the option to hire an attorney to manage their FBAR filings for them. This is generally advisable, as a federal tax attorney can help ensure not only that you file your FBARs correctly, but also that you meet all other applicable IRS filing requirements.
Importantly, the transition to the BSA E-Filing System has created an issue where spouses who jointly own a foreign financial account are not able to electronically sign the same FBAR. In order to address this issue, FinCEN advises that spouses should also complete FinCEN Form 114a (which designates a single spouse as the signatory for the couple’s FBAR), and then they should retain this form with their tax records.
Q: When are FBAR forms due?
FBAR forms are due to FinCEN on April 15 of the calendar year filing the tax year for which they are filed. However, there is an automatic extension to October 15, with no request required. If the federal tax filing deadline is extended due to a natural disaster or pandemic (as was the case in 2020 with the COVID-19 crisis), the FBAR filing deadline may be extended as well. However, filers will need to consult FinCEN’s website to confirm.
Q: What are the penalties for FBAR non-compliance?
The penalties for FBAR non-compliance can be substantial. These penalties can be either civil or criminal in nature (depending on the scope and nature of a taxpayer’s misconduct), and Section 5321(d) of Title 31 of the U.S. Code allows for both civil and criminal penalties to be imposed for the same offense in appropriate circumstances. The penalties for FBAR violations include (as of 2020):
- Negligent Violations: Civil fine of up to $1,078
- Non-Willful Violations: Civil fine of up to $12,459
- Willful Failure to File or Retain Account Records: Civil fines of up to $124,588 or 50% of the amount in the account(s) at the time of the violation, whichever is greater, and criminal penalties of up to a $500,000 fine and 10 years in prison
- Willful Filing of a False FBAR: Civil fines of up to $100,000 or 50% of the amount in the account(s) at the time of the violation, whichever is greater, and criminal penalties of up to a $10,000 fine and five years in prison
Speak with a Federal Tax Attorney at Oberheiden P.C.
We hope you have found our Ultimate Guide to IRS FBAR useful; and, if you have questions about FBAR compliance, we encourage you to speak with one of our senior federal tax attorneys. To schedule a confidential initial consultation at Oberheiden P.C., please call 888-680-1745 or tell us how we can reach you online today.