Navigating the complexities of international finance can be daunting, especially when it comes to fulfilling your reporting obligations to the U.S. government. One crucial aspect of this is understanding and complying with the Foreign Bank Account Report (FBAR) requirements. Whether you’re an expatriate with multiple accounts overseas or a domestic investor with foreign assets, ensuring you meet these obligations is essential to avoid hefty penalties and legal issues.
FBAR is a form used to report foreign financial accounts outside the United States. We've provided a detailed description of who must file below, but here is a high level look at who needs to know about Form 114 Report of Foreign Bank and Financial Accounts:
All U.S. persons that have a financial interest in or signature authority over a foreign financial account are required to file a FBAR form if the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.
A “U.S. person” means a U.S. citizen, U.S. resident, or U.S. entity. "U.S. entity" includes a corporation, partnership, trust or limited liability company (“LLC”) organized or formed in the United States. A U.S. LLC or a U.S. grantor trust may be required to file a FBAR form if it has an interest in a foreign bank account even though it may be treated as disregarded for U.S. income tax purposes.
The FBAR form is generally filed on an individual basis and is not filed jointly by spouses. However, the spouse of a U.S. person who files a FBAR form (the “Filer”) is not required to file a separate FBAR form if:
Consolidated filing procedures are available for entities that are required to report the same foreign accounts. Individuals are not allowed to consolidate FBAR form filings with an entity. For example, assume U.S. individual owns 100% of U.S. corporation. U.S. corporation owns 75% of a U.S partnership with a UK brokerage account worth $15,000. U.S. corporation can file a consolidated FBAR form for itself and U.S. partnership. U.S. individual is also required to report the UK brokerage account on the FBAR form (see below example) but must file separately and is not allowed to join the consolidated FBAR form filing with the entities.
A “foreign financial account” is a financial account located outside the United States.
Furthermore, U.S. persons are required to report foreign bank accounts that are indirectly owned by certain entities. Each U.S. person has a financial interest in an account if they (or their agent or representative) are the owner of record or holder of legal title, or has more than a 50% interest in the entity that is the owner of record or holder of legal title in a foreign bank account. This may result in duplicate reporting.
For example, a U.S. individual owns 75% of a U.S. corporation and that U.S. corporation has a Swiss bank account with $12,000. Both the U.S. individual and the U.S. corporation are each required to file a FBAR form to report ownership in the Swiss bank account of $12,000.
A U.S. person has signature authority over an account if they have the authority to control the disposition of the assets in the account by direct communication, whether in writing or otherwise, with the financial institution maintaining the account. The regulations provide exceptions to some officers and employees of specified regulated entities who will not need to report that they have signature authority over certain accounts in which they have no financial interest.
The FBAR is not an income tax return, and no payment is due when filing Form 114. It is an annual report filed separately with the Department of Treasury. It is required to be electronically filed through FinCEN’s BSA E-Filing System. The FBAR form is due April 15 following the calendar year being reported. No separate extension form is required to receive an automatic filing extension to October 15.
If the failure to file a FBAR form is unwilful, then the U.S. person may be imposed a civil penalty up to $10,000 per FBAR per year when FBAR was required. A non-willful violation is when a person didn’t know, or reasonably couldn’t be expected to know, that they were required to file an FBAR form.
Recent court rulings, including the 2023 Supreme Court decision in the Bittner case*, have clarified that per-form and not a per-account approach should be used to determine FBAR penalties. For example, if a Taxpayer fails to report 3 foreign accounts for 2 years, the FBAR form penalty can be up to $20,000 (and not $60,000) if no willful neglect is present. If U.S. filer failed to file the required FBAR form due to non-willful violation, then the U.S. person may also qualify for an IRS amnesty program which can help the U.S. person catch up on compliance without paying any fines.
If the failure is the result of willful neglect, then the penalty can be up to the greater of $100,000 or 50% of the account balance and criminal penalties may also apply.
It is a violation if U.S. person files a late FBAR form or not at all when required and the U.S. person will be subject to penalties (as discussed above). The IRS provides two voluntary disclosure programs for U.S. persons who need to file delinquent FBAR forms:
The Delinquent FBAR submission procedures are designed for U.S. persons who need to file late but do not have any unreported income related to the accounts, and therefore do not need to file delinquent or amended US tax returns to report and pay additional tax. Late submission of the FBAR form through Delinquent FBAR Submission Procedures will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for any tax or information returns.
The U.S. person will not be imposed a penalty for the failure to file the delinquent FBAR forms under procedures if the following criteria are met:
Streamlined compliance procedures can only be used by individuals or estates whose failure to report their foreign financial assets on an FBAR was not the result of willful conduct. These procedures are designed for situations where the U.S. person had unreported income related to undisclosed accounts and need to file amended or delinquent income tax returns as well as delinquent FBARs. Eligibility requirements and filing procedures under the Streamlined program depend on if the taxpayer lives inside or outside the United States. Taxpayers living in the United States are subject to a penalty of 5% of the highest aggregate balance/value of the unreported foreign accounts. This penalty does not apply to Taxpayers living abroad who qualify under the streamlined program.
Taxpayers with foreign financial accounts should consult their tax advisors to ensure compliance with all necessary tax filings related to their foreign accounts. This will help to avoid the onerous penalty assessments which may result from a failure to report. If delinquency is determined, then Taxpayers should make sure options to file under the amnesty programs or procedures are considered to ensure minimal penalty is assessed. If you have any questions please contact Jane Chang (jane.chang@hcvt.com or 714-361-7628) or Michele Carter (michele.carter@hcvt.com or 714-361-7627) for a consultation.
*Bittner v. U.S., 131 AFTR 2d 2023-799 (143 S. Ct. 713)
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