If you have a foreign interest or signature authority in a foreign financial account you may be required to file a Report of Foreign Bank and Financial Accounts (FBAR). If the sum of the following foreign accounts exceed certain thresholds during the year then an FBAR must be filed.
- Bank account
- Brokerage account
- Mutual fund
- Other type of foreign financial account.
Filing an FBAR is commonly missed by individuals who have foreign bank accounts but this error could cost thousands in unnecessary penalties. For those who willfully fail to file this annual report the penalty could be upwards of 100% of the amounts in the foreign accounts.
Who must file an FBAR?
The IRS defines those who may be required to file an FBAR as any “United States person” which includes:
- U.S. citizens
- U.S. residents
- Entities, including but not limited to, corporations, partnerships, or limited liability companies, created or organized in the United States or under the laws of the United States
- Trusts or estates formed under the laws of the United States
If you are consider a United States person then you are required to file an annual FBAR if both of the following apply:
- You maintain a financial interest in or signature authority over at least one financial account located outside of the United States; and
- the total value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported.
Let’s say you’re a U.S. citizen but your parents live abroad. You may have signing authority in a financial account and you transfer money to your parents to cover their monthly expenses. Assuming the value of the account exceeded $10,000 U.S. dollars you would be required to file an FBAR.
Even if the account doesn’t earn income and you’re not the main beneficiary of the funds in the account, because you have signing authority over the account you may still be required to file an annual FBAR.
FBAR Filing Deadline
The FBAR is a calendar year report so filing requirements may differ from year to year. If the sum of your foreign accounts don’t exceed $10,000 at any given time during the year then an FBAR may not be required. However, although an FBAR may not be required each year it may be beneficial to file anyway to avoid any unnecessary penalties.
FBARs have the same filing deadline as form 1040 and should be filed on or before April 15 of the year following the calendar year being reported. This means you will have until April of 2019 to report foreign accounts for the calendar year 2018. It should be noted that an FBAR is not filed with a federal tax return. Although they share the same filing deadline, the filing of an FBAR is separate from your federal tax return.
For filers who fail to meet the FBAR annual due date of April 15 an automatic extension to October 15 is available each year.
The penalty for failing to file an FBAR can be steep and could be as high as 100% of the value of all foreign bank accounts.
There are four civil penalties available for FBAR violations:
- Pattern of negligent activity
- Penalty for non-willful violation
- Penalty for willful violations
Negligence: Ignorance of the law is not a defense when it comes to avoiding FBAR penalties. Even if you were unaware of the filing requirement you can face a penalty of up to $500.
Pattern of negligence: A pattern of negligence is only applied to the most egregious of cases. This penalty is often confined to those with substantial amounts of money in foreign bank accounts and who failed to file an FBAR for several years. The penalty may be as high as $50,000.
Penalty for non-willfully violation: Any person who violates or causes any violation of the FBAR filing and record keeping requirements may face a penalty of $10,000 per each open year.
Penalty for willful violations: The penalty for willful FBAR violations may be imposed on any person who willfully violates or causes any violation of any of the FBAR filing and record keeping requirements. The penalty is equal to the greater of $100,000 or 50% of the balance in the account at the time of the violation.
Seek Professional Help
If you feel you may fall under the requirements of an FBAR filing then it’s best to seek the help of a professional. CPAs and lawyers are better equipped at navigating the complexities of federal government filing requirements and can save you thousands of dollars in unnecessary penalties.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer. Photo Copyright: <a href="https://www.123rf.com/profile_dolgachov">dolgachov / 123RF Stock Photo