1. Failure to File
The most common FBAR reporting mistake is simply failing to file. In many cases, Americans living and working outside the U.S., recent immigrants, foreign citizens who are resident in the U.S., and U.S. children who received gifts or bequests from their foreign parents are simply unaware of their FBAR filing obligations.
U.S. persons with ownership or signature authority over foreign financial accounts should obtain complete copies of their account records and fully educate themselves regarding FBAR reporting obligations and seek advice from experienced U.S. tax legal counsel.
Those who fail to resolve prior reporting errors remain exposed to substantial penalties and possible criminal prosecution. U.S. courts have not been sympathetic to uninformed foreign accountholders who failed to investigate their reporting obligations. In some cases, U.S. courts have imposed a penalty equal to 50% of the highest account balance for each year that remained open under the 6 year statute of limitations. Many who deliberately concealed offshore bank accounts have been prosecuted.
2. The $10,000 reporting threshold is NOT determined on an account-by-account basis.
FBAR reporting is required if the aggregate value of the U.S. person’s foreign financial accounts exceeds $10,000 at any time during the calendar year.
The reporting threshold is determined on an aggregate basis by adding the highest reported balance of every foreign account that the U.S. person owned or over which he or she had signature authority during the calendar year. Thus, signature authority over a corporate account with a maximum annual account balance of $7,000 and maintenance of a personal account with a maximum annual account balance of $7,000 requires filing an FBAR reporting both accounts because the aggregate value of the accounts exceeds $10,000.
3. An account with a balance under $10,000 MAY need to be reported on an FBAR.
A person required to file an FBAR must report all of his or her foreign financial accounts, including any accounts with balances under $10,000. Likewise, if the reporting obligation is triggered because a person has mere signature authority over corporate accounts with a maximum aggregate balance of more than $10,000, all personally maintained foreign accounts must also be reported, regardless of size.
4. The FBAR filing obligation is NOT ONLY triggered only if the maximum aggregate balance exceeds $10,000 at year-end.
The reporting obligation is triggered if the maximum aggregate balance exceeds $10,000 at any time during the calendar year. The regulations permit an account holder to rely on the balance reported in a periodic (i.e., monthly) statement, as long as the statement “fairly reflects” the maximum account balance during the year. For an account holding foreign currency, the FBAR instructions provide that an account holder should convert the monthly foreign currency balance to U.S. dollars using the Treasury’s financial management service rate (select Exchange Rates under Reference & Guidance at www.fms.treas.gov) for the last day of the calendar year.
The FBAR filing thresholds and other requirements for reporting foreign assets are different from those applicable to filing IRS Form 8938, Statement of Specified Foreign Financial Assets. Form 8938 is filed annually with a U.S. Federal Income Tax Return (Form 1040) and requires information reporting on a variety of “specified foreign financial assets,” as defined therein.
5. Failure to Report Beneficial Ownership
As a general rule, any U.S. person who has “signature or other authority” over, or is the owner of record of or holder of legal title to, a foreign financial account is required to file an FBAR, if the aggregate value of that person’s or entity’s foreign financial accounts exceeds $10,000 at any time during the calendar year. Under the regulations, the test for whether a person has signature or other authority over an account is whether the foreign financial institution will “act upon a direct communication from that individual regarding the disposition of assets in the account.” If the financial institution or account holder requires authorization from more than one individual, every individual who is authorized to direct the bank regarding the disposition of an asset is considered a signatory. If an account is in a person’s name or if he or she can sign a check, withdraw funds, direct investments, issue instructions to the bank (alone or in conjunction with another person), etc., then he or she is required to file an FBAR.
The obligation to file an FBAR extends well beyond signatories and legal account holders and includes any U.S. person who has a “financial interest” in a foreign financial account. The term “financial interest” is broadly defined in the regulations and generally includes a U.S. person who is a beneficial owner of the assets in the account, even though he or she may not be identified as the legal account holder in the records of the financial institution or able to communicate directly with the financial institution. Thus, a U.S. person is required to file an FBAR if the owner of record or holder of legal title of the account is acting on the person’s behalf as an agent, nominee, attorney or in some other capacity.
6. Failure to Report Life Insurance, Retirement and Other Nontraditional Financial Accounts
The definition of “financial account” is far broader than a traditional checking or savings account at a bank, and also includes, inter alia, certificates of deposit, passbook accounts, securities (investment) accounts, accounts with a person that acts as a broker-dealer for futures or options transactions, and mutual funds or similar pooled funds. Notably, the definition also expressly includes an insurance or annuity policy with a cash value.
In many circumstances, foreign retirement accounts must be reported on FBARs. Narrow exceptions apply to foreign financial accounts that are held by an IRA and to participants in certain tax-qualified retirement plans. When in doubt, the account should be reported to avoid the risk of substantial penalties.
7. Failure to File by a U.S. LLC, Partnership, Disregarded Entity or Estate
The federal tax treatment of an entity is not determinative of whether the entity has an FBAR filing requirement. Corporations, partnerships, limited liability companies, trusts and estates formed or organized under the laws of the United States all fall within the definition of a U.S. person required to file an FBAR. Thus, a Nevada or Delaware LLC treated as a disregarded entity is still required to file an FBAR if it maintains foreign financial account(s) with a maximum aggregate balance of more than $10,000. This is the case even if the owner of the LLC is foreign (i.e., not a U.S. taxpayer). When in doubt, the entity should file to avoid the risk of substantial penalties.
8. Failure to File an Individual Report by the Majority Owner of a Business Entity
A U.S. person who owns, directly or indirectly, “(i) more than 50% of the total value of shares of stock or (ii) more than 50% of the voting power of all shares of stock” of a U.S. or foreign corporation is treated as the owner of the corporation’s foreign financial accounts for FBAR reporting purposes and is required to file an FBAR on his or her own behalf reporting the corporation’s foreign financial accounts.
The rules apply similarly to a majority partner in a partnership or majority owner of any other entity. A U.S. person who owns, directly or indirectly, “(i) an interest in more than 50% of the partnership’s profits (e.g., distributive share of partnership income taking into account any special allocation agreement) or (ii) an interest in more than 50% of the partnership capital” is treated as the owner of the partnership’s foreign financial account(s) for FBAR reporting purposes and is required to file an FBAR on his or her own behalf reporting the partnership’s foreign bank accounts. FBAR reporting is also required regarding the foreign financial accounts of any other entity (including a disregarded entity for tax purposes) in which a U.S. person owns, directly or indirectly, more than 50% of the voting power, total value of equity interest or assets, or interest in profits.
Significantly, these personal filing obligations are separate from any obligation that the business entity in which the person holds a majority interest may have. Accordingly, if the corporation, partnership or other entity is a U.S. person, then the entity itself may also be required to file an FBAR. If either the entity or signatory files an FBAR, such a filing does not relieve the majority owner of his or her personal FBAR filing obligations.
9. Failure to File by the Trustee, Grantor or Beneficiary of a Trust
Several rules related to U.S. and foreign trusts cause confusion. First, as noted above, a U.S. trust that maintains foreign financial account(s) with a maximum aggregate balance in excess of $10,000 must file an FBAR. This reporting obligation applies even if the trust is treated as a disregarded entity for U.S. federal income tax purposes (such as a U.S. grantor trust). Second, any U.S. person who has signature or other authority over a U.S. or foreign trust’s foreign financial account(s) (e.g., a U.S. trustee) is also required to file an FBAR in his or her capacity as a signatory on the account.
In addition to the basic requirements noted above, a U.S. person who (i) is the trust grantor and (ii) has an ownership interest in the trust for U.S. federal tax purposes is treated as the owner of the trust’s foreign financial account(s) for FBAR reporting purposes and must file an FBAR reporting the trust’s foreign bank accounts. This is a personal filing obligation and is in addition to the trust’s filing obligations.
The rules for a trust beneficiary are slightly different. A U.S. person who is the beneficiary of a foreign or U.S. trust is treated as the owner of the trust’s foreign financial accounts for FBAR reporting purposes and is required to file an FBAR reporting the trust’s foreign bank accounts if the person has a greater than 50% present beneficiary interest in the assets or income of the trust for the calendar year. However, under the regulations, such a beneficiary may avoid FBAR reporting if the trust, trustee or agent of the trust is a U.S. person who files an FBAR disclosing the trust’s foreign financial account(s). This limited exception only applies to beneficiaries and does not apply to grantors or trustees. When in doubt, the beneficiary should file an FBAR reporting the trust’s account(s) to avoid the risk of substantial penalties.
10. Filing of Joint FBARs by Spouses, Except in Limited Circumstances
Spouses are permitted to file a joint FBAR only in limited circumstances. The FBAR instructions permit one spouse to file on behalf of the other only if all of the following three conditions are met: “(1) all the financial accounts that the non-filing spouse is required to report are jointly owned with the filing spouse; (2) the filing spouse reports the jointly owned accounts on a timely filed FBAR electronically signed; and (3) the filers have completed and signed FinCEN Form 114a Record of Authorization to Electronically File FBARs.” In other words, if the nonfiling spouse owns or has signature authority on an account that the filing spouse is not required to report, then both spouses must file separate FBARs.
The requirement to prepare and retain the Form 114a authorization is not well-known. Treasury’s instructions to Forms 114 and 114a specifically state that if a spouse files a joint FBAR, the nonfiling spouse must formally designate the filing spouse as his or her “third-party preparer” by signing and retaining the Form 114a authorization (duly executed by both spouses). The better practice is for each spouse to file separate FBARs, which avoids the risk that the IRS might later determine that either spouse failed to meet the FBAR requirements.
11. Failure to File by Minor Children
Minor children who are U.S. citizens or residents must file FBARs if they are the owners or signatories of foreign financial account(s) that meet the $10,000 aggregate threshold. All the same filing requirements discussed above apply equally in the case of a minor child. The FBAR instructions explain: “Generally, a child is responsible for filing his or her own FBAR. If a child cannot file his or her own FBAR for any reason, such as age, the child’s parent, guardian or other legally responsible person must file it for the child.”
12. Failure to Comply with Bank Secrecy Act Record Retention Requirements
In addition to filing an FBAR, a U.S. person who falls within the FBAR filing requirements is also obligated to maintain certain information and records relating to foreign financial accounts for five years. The records that must be retained include the following: (1) the name of the account holder; (2) the account number; (3) the name and address of the financial institution; (4) the type of account; and (5) the maximum value of each account during the reporting period. A complete and accurate FBAR (that includes all of the above information) will satisfy these record retention requirements. Nevertheless, the better practice is to retain complete copies of bank statements for all foreign financial accounts to support the FBAR for at least six years from the due date of the FBAR, which is the limitations period. The penalties for failing to maintain adequate foreign account records are the same as those for failing to file a timely and accurate FBAR.