October is a crucial month for US citizens with foreign financial accounts. This is because the final filing deadline to submit the Foreign Bank Account Report, also known as the FBAR, is on October 15.
Failure to submit this report before the FBAR deadline can result in significant fines. In fact, the IRS can penalize you up to $10,000 for each unfiled or missing FBAR.
The Foreign Bank Account Report is formally known as FinCEN Form 114. The Bank Secrecy Act implemented this form to prevent money laundering. The FBAR must be submitted electronically to the Financial Crimes Enforcement Network.
FBAR deadline dates
Even though the FBAR is not filed with the IRS as part of the tax return, law changes in 2017 aligned the deadlines.
The first deadline for the FBAR is April 15 along with your federal tax return. (For expats the tax filing deadline is June 15.) If you can’t file the FinCEN Form 114 by April 15, you get an automatic six-month extension. This moves the final FBAR deadline to October 15. .
Do I need to report my foreign bank accounts?
The FBAR is required for US persons foreign financial accounts. This includes US citizens, US residents or green card holders, and US entities.
Video: Do I need to report my foreign bank accounts?
If you have any accounts at financial institutions outside of the United States, you are considered a foreign financial account holder. Your association with these foreign financial accounts will determine whether you need to file the FBAR.
Simply, you need to submit the FBAR before the due date if:
- You have financial interest or signature authority over a foreign financial account, and
- The total value of those accounts is over $10,000 at any time during the year.
Financial interest or signature authority goes beyond just having a foreign account in your name.
When do you have a financial interest in a foreign financial account?
There are several ways you can have financial interest in an account. The primary way is to have your name listed as the owner of record or holder of the account. However, there are other ways that you can have financial interest.
You have financial interest and might need to file the FBAR if:
- You are the owner or holder of the account
- Another person is the owner or holder of the account, but they act and manage the account on your behalf
It is important to keep in mind, that you can have financial interest even if the account is not in your name.
For example, you are a US citizen. Your brother John maintains accounts in Mexico on your behalf. The accounts are in John’s name, but he only accesses the accounts as instructed by you. In this situation, you have a financial interest in the account. If John is also a US citizen or resident, he must also file an FBAR.
What is signature authority over a foreign account?
Signature authority means that you control the assets in a foreign financial account. This can occur even if your name is not listed or if the account is not yours.
If you provide instructions to the financial institution in written or other forms, you have signature authority. Signature authority is not limited to written communications according to the IRS. Furthermore, whether you have ever exercised your ability to control the account is irrelevant.
For example, your elderly parents have given you power of attorney over their bank account in Canada, but you have never exercised your power of attorney on the account. You must file the FBAR since you have signature authority over the account.
If you have signature authority over foreign accounts, you may need to report them on the FBAR.
When are financial accounts over the FBAR reporting threshold?
The threshold for the FBAR is $10,000. If the value of all your foreign accounts combined did not exceed $10,000 at any time during the calendar year, you do not need to file. However, it is important to understand how to calculate this value.
Even if an individual account never had more than $10,000, you may potentially still need to report it before the FBAR deadline.
If the highest balances of each account during the year added together is over $10,000, you need to file the FBAR.
For example, you have one bank account worth $5,000 in April and another bank account worth $6,000 in September. Even though neither of these accounts had a balance of $10,000 you need to file the FBAR. This is because the highest balances of the accounts when combined is $11,000.
This puts you over the $10,000 FBAR filing requirements rule. In other words, you must add together the highest balance of each account during the year.
If you have financial interest or signing power over one or more accounts, and the calculated value of your accounts is great than $10,000 you need to file the FBAR before the deadline.
Reporting other foreign assets on Form 8938
If you have other financial assets you may also need to file Form 8938. This form is for reporting financial assets such as mutual funds, foreign pensions, stocks, bonds, loans, and any investments. These types of assets are not included on the FBAR. Unlike the FBAR, the deadline for Form 8939 is in April with your federal tax return.
Form 8938 has a higher threshold than the FBAR. Depending on how you and your spouse (if applicable) file taxes, where you reside, and the value of your assets, the threshold varies from between $50,000 to $600,000.
Certain physical assets such as gold bars, antiques, jewelry, and some other assets do not need to be reported on either form.
Accounts with a foreign spouse
One common area of confusion is how a US expat should report their non-resident alien spouse’s foreign bank accounts. Your spouse is a non-resident alien if they do not have US citizenship nor US residency and they hold citizenship in another country.
This is also referred to as an NRA spouse.
You do not need to report your NRA spouse’s foreign accounts on the FBAR if both of the following are true:
- You do not have signing authority, and
- Your name is not associated with the accounts.
If you have signing authority or if your name is associated with the account, you must include the accounts in your FBAR report. This includes reporting joint accounts with your NRA spouse.
FBAR for business owners
Though many people think of the FBAR as only applicable to individuals, it also applies to US entities. A US entity is any corporation, partnership, LLC, trust or estate formed under US law.
The requirements for filing are the same for individuals and entities. Your US entity must submit the FBAR if it has a financial interest or signature authority on foreign financial accounts with a value greater than $10,000.
Whether you will need to submit an FBAR for your US entity depends on the amount of voting power you have, the number of shares, and several other factors. How your ownership is measured depends on the type of entity.
Subsequent entities may also trigger FBAR requirements
It is key that you are aware of other entities owned by your US entity. These subsequent entities may make your business liable to file the FBAR.
Your US parent entity has financial interest in a subsequent entity if it has at least 50% ownership.
Whether your entity has 50% ownership can depend on a variety of factors. These factors include the number of voting shares, percentage of profits or capital, or among others.
If the subsequent entity has financial interest or signature power on foreign financial accounts, then an FBAR must be filed.
Depending on the situation, the parent entity and the subsequent entity may be able to file a consolidated FBAR.
Complying with the FBAR deadline
Making sure you are in compliance before the October 15 filing deadline is essential. If you are concerned about what to report and how before the due date, it is important to contact a tax specialist.
For expert advising on expat tax issues, schedule a consultation with our team.