In today’s increasingly globalized economy, many people are surprised to find that they have a U.S. disclosure requirement on their foreign holdings. One such disclosure is the Financial Crimes Enforcement (FinCEN) Form 114: Report of Foreign Bank and Financial Accounts (FBAR). In this second article in our series on international issues, we fly through the basics of the FBAR.
Who are the FBAR’s “Passengers”?
Any U.S. person who either owns or has signature authority over a foreign account may have to report that account on an FBAR each year. Note that these filings impact any individual (including minor children) who is a U.S. citizen or resident alien. The definition of a U.S. person also includes domestic entities such as corporations, partnerships, trusts, and estates.
What is the FBAR’s “Baggage Limit”?
There is a minimum foreign asset balance that requires an FBAR disclosure. If the aggregate value of all foreign bank and financial accounts is more than $10,000 at any point during a calendar year, then the U.S. person must file an FBAR. Keep in mind that the $10,000 minimum is a cumulative balance at any point in the year. For example, a U.S. person with an $8,000 account and a $3,000 account has a balance of $11,000. Therefore, the individual or entity must disclose both accounts because the total balance exceeds the $10,000 threshold.
Which Foreign Accounts Must Pass through Security?
Applicable foreign accounts include:
- securities, brokerage, savings, or checking accounts held at a foreign financial institution;
- foreign-issued insurance policies with a cash value (such as a whole life insurance policy), or
- foreign-issued annuity policies with a cash.
Whether or not an account is truly “foreign” often depends on the parent bank’s location. For instance, an account maintained at a foreign branch of a U.S. bank is considered a foreign financial account. Likewise, an account maintained with a U.S. branch of a foreign bank is generally not considered a foreign financial account.
Additionally, the rules for FBAR disclosure include either a financial interest in or signature authority over a foreign account. A financial interest in a foreign account is easier to recognize because the U.S. person is typically the owner of record and holds legal title on the account. However, many people are caught off-guard by the signature authority requirement.
Signature authority simply means that a U.S. person (either alone or with another individual) can control the disposition of assets held in a foreign financial account. This mandate could mean that a corporate treasurer with signature authority over a foreign subsidiary’s foreign bank account would be required to report that signature authority on his or her personal FBAR. Similarly, a trustee holding signature authority over a trust’s foreign financial assets may have to disclose that control on a personal FBAR.
Why is an FBAR Such an Expensive Ticket?
With the scrutiny on international disclosures, the Department of Treasury wants to make sure that U.S. persons take this filing seriously. Therefore, the agency imposes serious penalties on those that don’t report their foreign assets properly or on time.
The civil penalties for a non-willful failure to file may be as high as $10,000 per violation if the person can’t claim a reasonable cause exception. However, if the IRS deems that a U.S. person willfully failed to file an FBAR, then the agency can assess civil penalties equivalent to the greater of $100,000 or 50% of the balance in an unreported foreign account per year for up to six tax years.
Let CRI Be Your FBAR “Travel Agent”
Given the stiff penalties for not filing an FBAR correctly or timely, be sure that your CRI tax professional is aware of your foreign assets. Contact CRI so that we can help you navigate your FBAR requirements.