The Foreign Bank Account Report (FBAR) is a mandatory filing requirement for U.S. persons who hold financial interests or signature authority over foreign financial accounts. Failing to comply with FBAR regulations can result in severe civil and criminal penalties. This comprehensive guide aims to provide a thorough understanding of FBAR, including who must file, what accounts are reportable, filing exceptions, penalties, and filing process.

What is FBAR?

The Bank Secrecy Act (BSA) grants the Department of the Treasury the authority to collect information from U.S. persons regarding their foreign financial accounts. The Financial Crimes Enforcement Network (FinCEN) administers the FBAR filing requirement, which involves submitting FinCEN Form 114, Report of Foreign Bank and Financial Accounts. This report is a crucial tool for the U.S. government to identify individuals or entities that may be using foreign financial accounts for illicit purposes, such as tax evasion, money laundering, or other financial crimes.

Understanding the Purpose of FBAR

The primary purpose of FBAR is to assist the government in detecting and deterring the use of foreign financial accounts for illegal activities. By requiring U.S. persons to disclose their foreign accounts, the government can better identify and trace funds used for illicit purposes or uncover unreported income maintained or generated abroad.

FBAR information plays a vital role in the enforcement of various laws, including tax laws, money laundering statutes, and other financial regulations. It provides valuable insights into potential financial crimes and helps authorities investigate and prosecute individuals or entities involved in such activities.

Who Should File FBAR?

A U.S. person is required to file an FBAR if they meet both of the following criteria:

1. They have a financial interest in or signature or other authority over one or more foreign financial accounts.
2. The aggregate value of all such foreign financial accounts exceeded $10,000 at any time during the calendar year being reported.

It's important to note that the filing requirement applies regardless of whether the foreign accounts generated any income or whether the income was reported on the individual's tax return. 

Who is called a “US Person”? 

For the purposes of FBAR, a "U.S. person" is defined as the one who meet these criterias: 

• U.S. citizens and residents, including individuals residing in the United States and those residing abroad.
• Entities (corporations, partnerships, trusts, limited liability companies) created, organized, or formed under U.S. laws, regardless of their physical location.
• Estates formed under U.S. laws.

It's crucial to understand that the federal tax treatment of an entity does not affect its FBAR filing requirement. Even entities that are disregarded for tax purposes may still be required to file an FBAR if they meet the criteria mentioned above.

What are Reportable Foreign Financial Accounts?

For FBAR, the term "foreign financial account" encompasses a wide range of accounts, including:

• Bank accounts (savings, checking, time deposits)
• Securities accounts (brokerage, securities derivatives, financial instruments)
• Commodity futures or options accounts
• Insurance or annuity policies with cash value
• Mutual funds or similar pooled funds
• Any other accounts maintained with a foreign financial institution or a person performing similar services

The location of the account, rather than the nationality of the financial institution, determines whether it is considered a "foreign" account for FBAR purposes. Accounts located outside the United States, U.S. territories, and Indian lands are deemed foreign accounts and must be reported if they meet the filing criteria.

How to calculate Maximum Account Value? 

To determine whether the aggregate value of foreign financial accounts exceeds the $10,000 threshold, U.S. persons must calculate the maximum value of each account during the calendar year. The maximum value is a reasonable approximation of the greatest value of currency and non-monetary assets in the account during the reporting period. Periodic account statements issued at least quarterly can be relied upon to determine the maximum value if they fairly reflect the highest value during the year. If no periodic statements are available, U.S. persons should use other reasonable methods to estimate the maximum account value.

For example:
John, a U.S. citizen, has a foreign bank account in Canada. During the 2022 calendar year, his quarterly account statements showed the following highest balances:

Q1 (March 31, 2022): $12,000 CAD 

Q2 (June 30, 2022): $8,500 CAD

Q3 (September 30, 2022): $14,000 CAD 

Q4 (December 31, 2022): $10,500 CAD

In this case, the maximum value of John's foreign account for 2022 would be $14,000 CAD (from the Q3 statement), as this represents the highest balance during the year.

To convert the maximum value to U.S. dollars, John would use the Treasury Reporting Rates of Exchange for December 31, 2022 (the last day of the calendar year). Let's assume the exchange rate on that date was 1 CAD = 0.75 USD.

The maximum account value in U.S. dollars would be: $14,000 CAD x 0.75 USD/CAD = $10,500 USD

Since the maximum value of John's foreign account exceeded $10,000 during 2022, he would be required to file an FBAR for that year.

If periodic statements are not available, John would need to use other reasonable methods, such as reviewing transaction records or contacting the financial institution, to estimate the maximum account value during the calendar year.

Understanding Financial Interests

A U.S. person is considered to have a financial interest in a foreign financial account if they meet any of the following criteria:

• They are the owner of record or holder of legal title, regardless of whether the account benefits them or someone else.
• The owner of record or holder of legal title is acting as an agent, nominee, attorney, or on behalf of the U.S. person.
• They own directly or indirectly more than 50% of the total value or voting power of a corporation that owns the account.
• They own directly or indirectly more than 50% of the partnership profits or capital of a partnership that owns the account.
• They are the trust grantor and have an ownership interest in the trust for U.S. federal tax purposes.
• They have a present beneficial interest in more than 50% of the assets or current income of a trust that owns the account.
• They own directly or indirectly more than 50% of the voting power, total value of equity interest, assets, or interest in profits of any other entity that owns the account.

 

Signature or Other Authority

A U.S. person is considered to have signature or other authority over a foreign financial account if they can control the disposition of assets in the account by direct communication (written or otherwise) with the financial institution maintaining the account. This authority can be exercised alone or in conjunction with another individual.

 

How to Report Jointly Held Accounts

In cases where multiple individuals jointly maintain a foreign financial account, each U.S. person with a financial interest or signature authority over the account must report the entire value of the account on their respective FBAR. However, there is a limited exception for spouses. If certain conditions are met, the spouse of an individual who files an FBAR does not need to file a separate report for jointly owned accounts. These conditions include:

• All foreign financial accounts the non-filing spouse must report are jointly owned with the filing spouse.
• The filing spouse reports the jointly owned accounts on a timely filed FBAR, electronically signed with a Personal Identification Number (PIN).
• Both spouses have completed and signed Form 114a, Record of Authorization to Electronically File FBARs, which is maintained with the filer's records.
• If these conditions are not met, both spouses must file separate FBARs and report the entire value of the jointly owned accounts.

Modified Reporting Requirements 

In certain situations, modified reporting requirements apply to simplify the FBAR filing process, these include: 

• Reporting a financial interest in 25 or more foreign financial accounts: U.S. persons with a financial interest in 25 or more foreign financial accounts are required to check a specific box on the FBAR and record the number of accounts, but they do not need to complete the account information section.
• Reporting signature or other authority over 25 or more foreign financial accounts: U.S. persons with signature or other authority over 25 or more foreign financial accounts must check a specific box, record the number of accounts, and complete a separate section identifying the account owners.
• U.S. persons employed and residing outside the U.S.: U.S. persons who reside outside the U.S., are employed by a U.S. employer physically located outside the U.S., and have signature authority over foreign financial accounts owned or maintained by their employer can complete a simplified version of the FBAR.

 

What are FBAR Filing Exceptions? 

Certain individuals and entities are exempt from the FBAR filing requirement, including:

• Owners or beneficiaries of certain tax-qualified retirement plans and IRAs

This exception applies specifically to owners and beneficiaries of Individual Retirement Accounts (IRAs) and retirement plans described in Sections 401(a), 403(a), or 403(b) of the Internal Revenue Code, which are located in the United States. These individuals do not need to report foreign financial accounts held by or on behalf of those plans or IRAs.

• Trust beneficiaries

If a trust, trustee, or agent of the trust is a U.S. person and files an FBAR disclosing the trust's foreign financial accounts, the beneficiaries of that trust do not need to separately report those accounts on their own FBAR filing. This exception applies only if the trust, trustee, or agent properly reports the accounts.

• Officers or employees of specific financial institutions

Individuals who have signature or other authority over, but no financial interest in, a foreign financial account owned or maintained by certain regulated financial institutions may be exempt from reporting those accounts under specific circumstances. These circumstances include:

• The individual is an officer or employee of a bank examined by certain federal banking agencies.
• The individual is an officer or employee of a financial institution registered with and examined by the Securities and Exchange Commission or Commodity Futures Trading Commission.
• The individual is an officer or employee of an authorized Service Provider registered with and examined by the Securities and Exchange Commission. 
• The individual is an officer or employee of an entity with a class of equity securities listed on a U.S. national securities exchange.
• The individual is an officer or employee of a U.S. subsidiary included in a consolidated FBAR report of the U.S. parent company with listed equity securities.

• Accounts jointly owned by spouses

As mentioned earlier, there is a limited exception for spouses from filing separate FBARs for jointly owned accounts. 

• Correspondent or nostro accounts

Correspondent or nostro accounts maintained by banks and used solely for bank-to-bank settlements do not need to be reported on an FBAR.

• Governmental entities and certain international financial institutions

Foreign financial accounts of governmental entities, such as state-administered colleges or universities, and certain international financial institutions like the World Bank and International Monetary Fund, are exempt from FBAR reporting.

• Financial accounts in U.S. military banking facilities

Accounts located in U.S. military banking facilities, operated by a U.S. financial institution to serve U.S. Government installations abroad, do not need to be reported on an FBAR, even if the military installation is outside the U.S.

What are Recordkeeping Requirements for FBAR? 

U.S. persons are required to maintain accurate accounting and bookkeeping records related to their reportable foreign financial accounts for a period of five years from the due date of the FBAR. These records should include the following information:

• Name in which each account is maintained.
• Account number or other identifying designation.
• Name and address of the foreign financial institution or other entity maintaining the account.
• Type of account (e.g., bank account, securities account, insurance policy).
• Maximum value of each account during the reporting period.

Retaining a copy of the filed FBAR can help satisfy the recordkeeping requirements. Additionally, officers or employees who file an FBAR solely to report signature authority over their employer's foreign financial accounts are not required to personally maintain records for those accounts.

What are the Penalties?

Failure to timely file a complete and correct FBAR can result in significant civil monetary penalties and criminal penalties. For civil penalty assessments prior to August 1, 2016, non-willful violations could result in penalties up to $10,000. Willful violations, however, carried heftier penalties of up to the greater of $100,000 or 50% of the account balance at the time of the violation. Additionally, criminal penalties, such as fines and imprisonment, may also apply in cases of willful FBAR violations or failure to file/retain records.

Delinquent FBAR Submission

If a U.S. person becomes aware that they should have filed an FBAR for a previous year, they should electronically file the delinquent FBAR through the BSA E-Filing System as soon as possible. When filing the delinquent FBAR, they can indicate the reason for the late filing, such as "Explain a late filing" or "Other," and provide an explanation within the text box provided.

If the delinquent FBAR is properly filed and the IRS determines that the violation was due to reasonable cause, no penalty will be imposed. However, it is crucial to file the delinquent FBAR promptly to minimize the risk of penalties.

FBAR Reporting and Filing Deadline

The FBAR is a calendar year report and must be received by the Department of the Treasury on or before April 15th of the year following the calendar year being reported. For example, the FBAR for the 2022 calendar year must be filed by April 15, 2023. An automatic extension until October 15th is granted without the need for a specific request. If additional time is required beyond October 15th, U.S. persons should file as complete an FBAR as possible and amend it when more or new information becomes available.

Where to File FBAR?

The FBAR (FinCEN Form 114) must be filed electronically through the BSA E-Filing System maintained by the Financial Crimes Enforcement Network (FinCEN). Paper filings are no longer accepted for FBAR submissions. The BSA E-Filing System is a secure and user-friendly online platform that allows individuals and organizations to file various reports required by the Bank Secrecy Act (BSA), including the FBAR. This electronic filing system is designed to streamline the reporting process and improve efficiency in data collection and analysis.

To file the FBAR through the BSA E-Filing System, you can follow these steps:

1. Access the BSA E-Filing System website (https://bsaefiling.fincen.treas.gov/main.html).
2. Create an account or log in to an existing account. The system supports individual and organizational accounts.
3. Select the option to file an FBAR (FinCEN Form 114).
4. Complete the required fields and provide all necessary information about foreign financial accounts, following the instructions provided.
5. Review and submit the FBAR electronically.

Upon successful submission, filers will receive an acknowledgment from the BSA E-Filing System, which can be used as proof of filing. It's important to note that the FBAR is a separate filing requirement from federal tax returns, and it must be filed directly through the BSA E-Filing System. The FBAR should not be attached to or submitted with federal tax returns.

The transition to mandatory electronic filing of FBARs was implemented on July 1, 2013, to enhance the efficiency and security of the reporting process. By eliminating paper filings, the BSA E-Filing System streamlines data collection, reduces processing times, and minimizes the risk of lost or mishandled reports.

Reporting on Tax Returns

In addition to filing the FBAR (FinCEN Form 114) itself, U.S. persons are required to answer FBAR-related questions on certain federal tax returns. This serves as an additional reporting mechanism and helps the IRS identify individuals or entities who may have failed to file the required FBAR.

The tax forms that include FBAR-related questions are:

1. Form 1040 (U.S. Individual Income Tax Return), Schedule B: Individuals must answer Questions 7a and 7b on Schedule B, which ask about their interest in or signature authority over foreign financial accounts.
2. Form 1041 (U.S. Income Tax Return for Estates and Trusts): In the "Other Information" section of Form 1041, Question 3 asks whether the estate or trust has an interest in or signature authority over a foreign financial account.
3. Form 1065 (U.S. Return of Partnership Income), Schedule B: Partnerships must answer Question 8 on Schedule B, which inquires about the partnership's interest in or signature authority over foreign financial accounts.
4. Form 1120 (U.S. Corporation Income Tax Return), Schedule N: Corporations are required to answer Questions 6a and 6b on Schedule N, which relate to their interest in or signature authority over foreign financial accounts.

If a U.S. person answers "Yes" to any of these FBAR-related questions, they are expected to provide additional information, such as the name of the foreign country where the account is located and the maximum value of the account during the tax year.

Conclusion

Complying with FBAR filing requirements is crucial for U.S. persons with foreign financial accounts. Failure to properly report these accounts can result in severe civil and criminal penalties, making it essential to understand and adhere to the regulations. While the FBAR filing process may seem complex, seeking professional guidance can help ensure compliance and avoid potential penalties. NSKT is a leading accounting and tax firm, offers comprehensive FBAR compliance services to assist individuals and businesses in navigating the intricate reporting requirements. Our team of experienced tax professionals has in-depth knowledge of FBAR regulations and stays up-to-date with the latest developments. We can help you determine whether you are required to file an FBAR, identify reportable foreign financial accounts, accurately calculate maximum account values, and ensure timely and accurate filing through the BSA E-Filing System. Our expertise can provide peace of mind and minimize the risk of penalties associated with non-compliance.

Contact us today to discuss your FBAR needs and take the first step towards ensuring compliance and minimizing risks.