Understanding the FBAR: How to File and Report Foreign Bank and Financial Accounts

Any taxpayers and US Persons that claim ownership of foreign accounts and earnings are required by law to note these finances on the FBAR, or Report of Foreign Bank and Financial Accounts, which is then reported to FinCEN (U.S. Treasury’s Financial Crimes Enforcement Network) Form 114.This file is in addition to your standard US tax return. The IRS is responsible for assessing and enforcing the penalties of the FBAR, but it is not technically a tax form due to its connection to FinCEN. This has consistently been a focus of the government agency. FBAR violations could result in severe civil penalties and, in some rare cases, criminal charges. If violations occur, they are typically civil cases filed against the US citizen. If there is no specific US citizen to file charges against, then the following entities could become liable:  

• A Corporation

• Partner

• Trust

• Limited Liability Company (LLC)

• An estate

These charges could result in financial penalties – that is, if you aren’t successful with a non-willful penalty waiver. If financial penalties occur, they will be based on how many years the account has gone unrecorded, or the maximum balances on the account. This amount could consist of up to 50% willfulness penalties. Amnesty programs have been created by the IRS to assist in avoiding these penalties, or at least reduce them. This practice is known as offshore voluntary disclosure. Here you’ll find the breakdown of the FBAR, timeframes for filing, and if you hold the responsibility of filing.

It’s important to understand that the FBAR is a financial account, not a simple bank account. Foreign financial accounts differ significantly because they contain reportable items such as checking accounts, saving accounts, options accounts, mutual or pooled funds, insurance, or commodity futures (among others). For the time being, cryptocurrency is not required to be reported to the IRS under the same strict stipulation, unless the account holds a combination of cryptocurrency alongside other types of currency. It should be noted that this is subject to change. Notice 2020-2 is a precursor to requiring virtual currency to be reported under 31 CFR 1010.350.

Reporting Requirements and Financial Interest

If you are required to file an FBAR, you must report the maximum account amount for the year in question. Use the current exchange rate on the final day of the year to convert foreign funds to US dollars, and refer to the Treasury Reporting Rates of Exchange for the most up-to-date information.

Those with joint accounts and/or partial ownership of an account need to report the full amount, not just their own interest or portion. For example, if you are a fourth owner of an account totalling $200,000, you cannot simply report $50,000 as “your” portion. You need to report the full account, as outlined by IRS Publication 5569.

Exceptions, Due Dates, and Penalties

There are very few exceptions to the FBAR, and you will most likely need to file in order to clearly and correctly report foregin accounts and earnings. The most typical exception is a person that owns a retirement account in the US that might have foreign assets held within a US IRA or other comparable retirement asset collection. You may be able to avoid FBAR reporting, but you should clear this with a professional CPA to ensure you are acting within federal tax laws.

The FBAR is due in April, along with your standard taxes, but the form has been on an automatic extension for several years. This gives the taxpayer additional time to file, and to avoid filing Forms 7004 or 4868, you should turn in the necessary paperwork by at least October.

FBAR violations can result in severe penalties, but courts and government tax entities often debate over what is considered a violation. The IRS provides documentation to help clearly define an FBAR violation, and offers a few different amnesty services to help applicable taxpayers get back in line with US tax code.

For full clarity and any specific questions and inquiries, reach out to the tax professionals at Dimov Tax & CPA Services for FBAR assistance! Our team of efficient CPAs can help you file the correct paperwork, ensure all accounts are, well, accounted for, and help you distinguish between accounts to determine financial interest and/or FBAR compliance.