Are You Required to Report Your Foreign Accounts to the U.S Government?
DO YOU HAVE FOREIGN BANK ACCOUNTS? IF SO, BE AWARE OF COSTLY FBAR FILING ERRORS!
US persons owning foreign financial accounts can be misinformed on the requirements that are necessary to comply with their U.S. tax filing and reporting obligations. We hope this summary will shed some light on the most common mistakes we regularly identify when reviewing tax returns for our clients.
THE TEST: Form FinCEN 114, Report of Foreign Bank and Financial Accounts (the “FBAR”) is required to be filed by US persons who have a direct or indirect financial interest, or signature authority or control over, foreign financial accounts, if the aggregate value of all foreign financial accounts exceed $10,000 at any given point during the year.
DUE DATE: The FBAR due date is scheduled to change for tax years after December 31, 2015 (2016 FBAR reporting), and will be due on April 15 of each year. An extension to file the FBAR will now be allowed, until October 15 of each year. The FBAR deadline for 2015 still remains June 30, 2016, with no extension allowed.
WHO IS REQUIRED TO FILE: US persons who satisfy the FBAR $10,000 filing threshold. US persons include individuals who are US citizens, green card holders, and persons who meet the substantial presence test. It also includes entities (corporations, partnerships, trusts, etc.) established, organized and/or subject to U.S. laws.
WHAT ARE THE PENALTIES: Unless excused by reasonable cause, the penalty for failure to file a complete FBAR is up to $10,000 per omission per year for negligent, non-willful failure, or the greater of $100,000 or 50% of the account balance per omission per year for willful failure. Criminal penalties may also apply for willful failures to file the FBAR, including a fine of not more than $250,000 and up to 5 years of imprisonment.
ERRORS AND MISCONCEPTIONS:
Misunderstanding the filing threshold amount of $10,000. The filing threshold applies to the aggregate maximum balances of all your foreign financial accounts at any given point during the year. For example, if you have 5 foreign bank accounts during any given year, and the maximum balance of each account is equal to $2,500, you will trigger an FBAR reporting obligation. The FBAR threshold applies cumulatively across all foreign accounts, not on a separate account basis.
Not Reporting Life Insurance, Annuities, Retirement Plans, Brokerage Accounts, Commodity Futures or Option Account, etc.Often, people think that FBAR only applies to typical checking and savings accounts. The definition of “foreign financial account” is defined broadly and includes any account maintained with a financial institution. For example, the reporting requirement also applies to life insuranceand annuities with a cash surrender values.
Not Reporting Signatory Accounts. Even if you are not the owner of the account, but merely have signatory authority (e., the right to control the disposition of the funds), you are still required to report the account (assuming you meet the $10,000 FBAR filing threshold).
Not Reporting Indirect Ownership. Foreign accounts held by an offshore corporate entity are reportable if you own more than 50% of the stock of such entity. Therefore, the maximum yearly balance of foreign corporate accounts held indirectly may trigger an FBAR reporting obligation (assuming you meet the $10,000 FBAR filing threshold). Even if you own less than 50% of the stock of the foreign entity, you still may be required to report the foreign corporate account if you hold signature authority (item 3 above) as director/manager (or other capacity) of the entity.
Failing to file if you are a Trustee, Grantor or Beneficiary in a foreign account.A Trustee is required to file because of his/her capacity as a signatory on the account (assuming the $10,000 FBAR filing threshold is met). Similarly, the Grantor of a trust may have to report foreign financial accounts held in trust, if the Grantor is deemed the owner of the trust for income tax purposes. Further, a Beneficiary who has a greater than 50% beneficial interest in the assets or income of a trust, may be required to report foreign financial accounts held in trust.
FBAR applies to U.S. entities (limited liability companies, partnerships, corporations, etc.), trusts and estates. Individuals are not the only ones subject to the FBAR reporting obligation. A corporation, LLC, partnership organized in the US holding foreign financial accounts which meet the FBAR filing threshold is required to file an FBAR. Same applies to U.S. trusts and estates
Filing jointly with your spouse and not for yourself. Filing an FBAR on behalf of your spouse is common practice if both parties benefit from the accounts being reported (i.e., jointly held accounts). However, if only one benefits from the account (each spouse has separately owned accounts), they are required to file a separate FBAR for that account.
Forgetting the FBAR also applies to minors. Minor children are also subject to FBAR filing requirements. If your children are signatories on your foreign financial account, or have a joint ownership interest in such accounts, they are required to file a separate FBAR, assuming they independently meet the $10,000 FBAR filing threshold.
Listed above are only a few misconceptions and errors pertaining to the filing of FBAR’s. Failure to timely and accurately file an FBAR can lead to serious civil and criminal penalties. If you believe you are non-compliant, failed to file or misfiled an FBAR, there are several options to cure your delinquencies, and minimize exposure to FBAR penalties by selecting an adequate disclosure option (OVDP, SDOP, SFOP, etc.).
If you need assistance, you may contact Barbosa Legal a tax attorney at Barbosa Legal, to discuss your specific situation, knowing your communications will remain protected under the attorney-client privilege.
If this article is of interest to you and you think that you can benefit from a consultation in regards to FBAR filings, do not hesitate to contact our office so we can schedule you with one of our expert attorneys at Barbosa Legal to better assist you in your important decision making.