For expats, it's common for most to be required to file a Report of Foreign Bank and Financial Accounts (FBAR), primarily because living abroad often necessitates having a foreign bank account for everyday transactions. However, it's important to note that the requirement to file an FBAR isn't exclusive to expats. Individuals residing and working within the U.S. are also subject to this requirement if they have foreign financial accounts. This rule underscores the broad applicability of FBAR regulations, encompassing not just those living abroad but also anyone domestically who maintains foreign financial interests.
Who must file the FBARs?
As a US Person, you are required to file an FBAR if you have either a financial interest in, or signature or other authority over, one or more financial accounts located outside the United States. The key trigger for this filing requirement is if the total value of these accounts exceeds US$10,000 at any point during the calendar year.
This means if you have any financial dealings with foreign accounts, you need to be vigilant about tracking the aggregate amounts in these accounts. Crossing the $10,000 threshold, even temporarily, brings into play the need for an FBAR filing to stay compliant.
What is a “financial account”?
Here's a breakdown of what constitutes a financial account for FBAR purposes:
Bank accounts: This includes savings and checking accounts, as well as time deposits.
Securities accounts: Examples are brokerage accounts, accounts holding securities derivatives, and other financial instruments accounts.
Commodity and options accounts: This refers to accounts like commodity futures or options accounts.
Insurance and annuity policies with cash value: Such as whole life insurance policies.
Mutual funds and pooled funds: These are funds open to the public with regularly determined net asset values and redemption options.
Other foreign financial institution accounts: Any other accounts held at foreign financial institutions or with persons acting as financial institutions.
Examples:
Reportable: Canadian Registered Retirement Savings Plans (RRSPs), Canadian Tax-Free Savings Accounts (TFSAs), Mexican individual retirement accounts (Fondos para el Retiro), and Mexican Administradoras de Fondos para el Retiro (AFORE) are examples of foreign financial accounts that need to be reported on the FBAR.
Non-reportable: Foreign hedge funds and private equity funds currently do not fall under the FBAR reporting requirements.
Special note on virtual currency: A foreign account holding virtual currency is not reportable on the FBAR unless it’s classified as a reportable account under 31 C.F.R. 1010.350 due to holding other reportable assets. As of FinCEN’s 2011 regulations and FinCEN Notice 2020-2, virtual currency is not yet included as a reportable account type, but there are indications that FinCEN intends to amend this in the future.
What is considered a “foreign” financial account?
A foreign financial account is essentially an account with a financial institution that is physically located outside of the US It's the location of the account, rather than the nationality of the financial institution, that determines its "foreign" status for FBAR.
An account is “foreign” for FBAR purposes if it’s located outside the following places:
Any state within the United States, including the District of Columbia
US territories and possessions, such as: Commonwealth of the Northern Mariana Islands, American Samoa, Guam, Commonwealth of Puerto Rico, US Virgin Islands, and Trust Territory of the Pacific Islands
Indian lands as per the Indian Gaming Regulatory Act
Examples:
Foreign Account: If you have an account in a branch of a US bank that's physically located in Germany, that’s a foreign financial account for FBAR purposes.
Not a Foreign Account: Conversely, an account with a branch of a French bank that's physically located in Texas doesn’t count as a foreign financial account.
Investment example: Let’s say Tom, a US citizen, buys securities of a French company through a broker in New York. Tom doesn’t need to report these securities on an FBAR because he made the purchase through a financial institution located within the US.
What is “maximum account value”?
The maximum account value refers to the highest value of currency and non-monetary assets in your foreign financial account during the calendar year. It's about finding the peak value, not just the average or year-end balance.
How to determine maximum account value:
Using account statements: You can use your periodic (at least quarterly) account statements to ascertain this value, provided they accurately reflect the account's peak value throughout the year.
Conversion to USD: First, find the maximum value in the account's currency. Then, convert this value to USD using the exchange rate on the last day of the calendar year.
For example, if you have an account in Singapore, you'd first determine its maximum value in SGD. Then, convert this SGD amount into USD. Use the Treasury Reporting Rates of Exchange for the last day of the calendar year for conversion. If this isn't available, use another reliable exchange rate, and be sure to document the source of that rate.
Examples:
Multiple accounts scenario: Imagine James, a US citizen, has three foreign financial accounts with maximum values of $100, $12,000, and $3,000. Even though two accounts are below $10,000, their combined value exceeds $10,000, meaning James needs to file an FBAR.
Aggregate value matters: Kathy has three accounts worth $3,000, $1,000, and $8,000. She must report all because their total value is over $10,000, even though no single account crosses the $10,000 threshold.
Income irrelevant for reporting: Dee’s foreign account peaks at $15,000, but it doesn’t generate income. She still needs to file an FBAR, as the requirement is independent of whether the account produces income.
What is a “financial interest”?
A US Person has a financial interest in the following scenarios:
Direct ownership: A US person is considered to have a financial interest if they are the owner of record or legal titleholder of an account, irrespective of who benefits from it, including non-US persons.
Ownership through others: If someone else holds the account as an agent, nominee, attorney, or on behalf of a US person, the latter still has a financial interest.
Corporate ownership: A US person with more than 50% of the total value of shares or voting power in a corporation that owns foreign accounts has a reportable financial interest.
Partnership interest: If a US person owns more than 50% of a partnership's profits or capital, they have a financial interest in foreign accounts owned by the partnership.
Trusts: US persons are considered to have a financial interest in a foreign account if they are the grantor of a trust with such accounts and are deemed the owner for US tax purposes.
Beneficial interest in trusts: A US person with more than 50% present beneficial interest in a trust's assets or income must report the trust's foreign accounts. However, a remainder interest does not constitute a present beneficial interest.
Other entities: Ownership of more than 50% of the voting power, equity interest, assets, or profit interest in any entity necessitates FBAR reporting.
What is “signature or other authority”?
Signature or other authority refers to the ability of an individual, either on their own or together with someone else, to manage or direct the handling of assets in a foreign financial account. This authority is exercised through direct communication, which can be either in writing or through other means, with the bank or financial institution where the account is maintained. Even if you haven't actively managed the account, simply having the authority to do so can trigger the FBAR filing requirement.
Example: Minnie, a US citizen, holds power of attorney for her parents' accounts in Canada. Despite never using this power, Minnie is required to file an FBAR if the power of attorney grants her control over these accounts. The key factor is the authority itself, not whether it has been exercised.
Simplified reporting requirements for individuals holding a financial interest in 25 or more foreign accounts or have signature or other authority for 25 or more foreign accounts
Reporting multiple financial interests: If you have a financial interest in 25 or more foreign accounts, you will only need to mention the total number of accounts without having to provide detailed information, but you’ll need to keep records of the detailed information in case you are ever audited.
Signature authority over multiple accounts: If you have signature authority over 25 or more foreign accounts, you will only need to mention the total number of accounts without having to provide detailed information and complete Part IV (Items 34-43) for each person under your signature authority.
Example: Peter, with financial interests in 12 foreign accounts and signature authority over 17, must complete the entire FBAR, as his account numbers fall below the 25-account threshold for both categories.
Due dates
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. But, FinCEN will grant filers failing to meet the FBAR annual due date of April 15th an automatic extension to October 15th each year. Filers don’t need to specifically request this extension.
If a filer doesn’t have all the information available to file the FBAR by the automatic extension date of October 15th, the filer should file as complete an FBAR as possible and amend it when more or new information becomes available. Refer to the electronic filing instructions for information on filing amended FBARs.
Penalties
Those who must file an FBAR and fail to timely file a complete and correct FBAR may be subject to civil monetary penalties, criminal penalties, or both. Currently, the civil penalty for a non-willful FBAR violation is US$10,000 per form and no criminal penalties. Not per account as determined by the Supreme Court in Bittner v. United States.
For a willful FBAR violation, the civil penalties would be the greater of US$100,000 (adjusted for inflation) or 50% of the maximum account balance during the year. The criminal penalties could include fines up to US$250,000 and imprisonment.
Conclusion
It's crucial to diligently file your FBARs. Remember, FBARs are primarily for informational purposes and don't inherently lead to tax liabilities for the accounts disclosed. However, discrepancies between your FBARs and your tax returns could trigger an audit. Therefore, I strongly advise adopting a cautious and conservative approach when completing this form to ensure accuracy and compliance.
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