There are US citizens and resident aliens who maintain foreign financial accounts for a variety of legitimate reasons, including access and convenience. The Foreign Bank and Financial Account Report (FBAR) is required because foreign financial institutions may not be subject to the same reporting requirements as US financial institutions. The FBAR is also used by the US government to identify individuals who may be using foreign financial accounts to circumvent US laws.
This column discusses the FBAR, including filing requirements, where on a federal income tax return an individual indicates where he or she may have an FBAR filing requirement, what is considered a foreign financial account, how the FBAR is filed, and penalties for not filing an FBAR.
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The FBAR is a calendar year annual report that must be filed on or before April 15th following the year the FBAR covers. For the calendar year 2023, the FBAR is due April 15, 2024. Any individual with ownership, joint ownership, or signature authority over one or several foreign accounts in which the aggregate total value of all accounts exceeds $10,000 on any day of the year must file an FBAR. Accounts include foreign brokerage accounts, foreign pensions and foreign cash value life insurance policies. The following should be noted about FBAR filing:
• Electronically filed. The FBAR must be filed electronically on FinCEN Form 114 (Report of Foreign Bank and Financial Accounts) through the Financial Crimes Enforcement Network (FinCEN) BSA E-Filing System. The FBAR is not filed with an individual federal income tax return.
• Filing deadline of April 15. The FBAR filing deadline is April 15. When the IRS grants a filing extension for an individual’s federal income tax return, it does not extend the time to file an FBAR. There is no provision in the law for requesting an extension of time to file an FBAR but is automatically extended to October 15.
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• Children are responsible for filing their own FBAR. Children who have to file an FBAR must do so. If a child cannot file his or her own FBAR for any reason (for example, the child is too young), then the child’s parent, guardian or other legally responsible person must file the child’s FBAR on behalf of the child.
• FBAR delinquent filings. Individuals who over the years have not filed a required FBAR should nevertheless file any delinquent FBAR. This is especially true if individuals are not under a civil examination or a criminal investigation by the IRS and have not been contacted by the IRS. There is an option in the FBAR filing instructs to include a statement of why the FBAR is being filed late. A reason for filing late is available from a drop-down list or “other.” The reason for including a reason the FBAR is being filed past the deadline is that if the IRS determines that the FBAR filing was due to a reasonable cause, the individual may not be subject to a penalty. Delinquent filing penalties are discussed below.
An individual who holds a foreign financial account may have a reporting obligation even when the account produces no taxable income. The reporting obligation is met by answering questions on the applicable tax return about foreign accounts such as shown on Part III of Schedule B of IRS Form 1040 (Foreign Accounts and Trusts), as shown here:
On line 7a of Schedule B, an individual should check the “Yes” box if the individual owns more than 50 percent of the stock in any corporation that owns one or more foreign bank accounts. This rule does not apply to foreign securities held in a U.S. account. A financial account is located in a foreign country only if the account is physically located outside of the United States.
Schedule B instructions include additional examples of financial accounts that go beyond the “traditional” notions of financial accounts. This includes for example a commodity futures or options account, an insurance policy with a cash value such as a whole life insurance policy, or an annuity policy with a cash value.
A financial account is considered “foreign” when it is located outside the United States. Typically, a financial account that is maintained with a financial institution located outside the US is a foreign financial account. The following are examples:
Example 1. An account maintained with a branch of a US bank that is physically located in France is a foreign account; and
Example 2. An account maintained with a branch of a French bank that is physically located in Atlanta, Georgia is not a foreign financial account.
As mentioned above, any individual with ownership, joint ownership or signature authority over one or several foreign accounts with an aggregate total value of all accounts over $10,000 on any day of the year must file an FBAR. For purposes of determining the maximum value of an account, note the following:
(1) The maximum value of an account is a reasonable approximation of the greatest value of currency of non-monetary assets in the account during the calendar year; and
(2) The maximum value of a foreign account is determined in the currency of the account. After the maximum value is determined, the maximum account value for each account is converted into US dollars, using the exchange rate on the last day of the calendar year.
Whether or not an account produces income does not affect the requirement to file an FBAR.
The following individuals are exempt from the FBAR filing requirements:
• IRA owners and beneficiaries. An owner or beneficiary of an IRA is not required to report a foreign account held in the IRA.
• Participants in and beneficiaries of tax-qualified retirement plans including the TSP. A participant in or a beneficiary of a retirement plan, described in Internal Revenue Code Section 401(a), 403(a), or 403(b), is not required to report a foreign financial account held by or on behalf of the retirement plan, and
• Trust beneficiaries, A beneficiary of a trust in which the beneficiary has a financial interest does not need to report the trust’s foreign financial accounts on an FBAR if the trust, trustee of the trust, or agent of the trust is a U.S. person and files an FBAR disclosing the trust’s foreign financial accounts.
Failure to file an FBAR when required to do so may result in civil penalties, criminal penalties or both. When a US person (a citizen or resident alien) learns that an FBAR should have been filed for a previous year, the filer should electronically file the delinquent FBAR report using the BSA E-Filing System website. The system allows the filer to enter the calendar year reported, including past years in the line FinCEN Form 114. It also offers an option to “explain a late filing” or to select “other” to enter up to 750 characters within a text box in which the filer can provide a further explanation of the late filing or indicate whether the filing is made in conjunction with the IRS compliance program. If the foreign financial account is properly reported on a late-filed FBAR and the IRS determines that the FBAR violation was due to reasonable cause, no penalty will be imposed.
