- 1 Foreign Bank & Financial Account Reporting (FBAR) Explained
- 2 What to Know About FBAR Reporting
- 3 General FBAR Definitions
- 4 Filing Information for FBAR
- 5 Monetary Amounts Reported on FBAR
- 6 Exceptions to FBAR
- 7 31 U.S. Code § 5314 – Records and reports on foreign financial agency transactions
- 8 FBAR Regulations 1010.350 Reports of foreign financial accounts (in Part)
- 9 Civil & Criminal FBAR Penalties
- 10 31 USC 5321 et seq. Civil FBAR Penalties: Willful or Non-Willful
- 11 Non-Willful FBAR Penalties
- 12 Willful FBAR Penalties
- 13 What if You Were Assessed FBAR Penalties?
- 14 FBAR Enforcement is a Key Priority
- 15 Golding & Golding: About Our International Tax Law Firm
Foreign Bank & Financial Account Reporting (FBAR) Explained
Foreign Bank & Financial Account Reporting (FBAR) Explained: The FBAR is a shorthand of referring to FinCEN Form 114. The acronym “FBAR” refers to Foreign Bank and Financial Account Reporting or “FBAR Reporting.” Each year, certain US Person Taxpayers who meet the FinCEN Form 114 requirements for reporting foreign bank and other financial accounts (investments, foreign pension, etc.) have an annual FBAR Filing requirement — which since 2013 is handled electronically and directly on the Financial Crimes Enforcement Network (FinCEN) website. Unlike other international information reporting forms, the FBAR is not a Tax Form. Still, the IRS is tasked with assessing and enforcing FBAR Penalties — which has been a US Government compliance priority for several years now. Foreign Bank and Financial Account violations may result in Civil and/or Criminal FBAR penalties — although criminal penalties are rare. Usually, the US Person will get hit with civil penalties — which can range from non-willful penalty waivers in lieu of financial penalties — all the way up to a 50% willfulness penalty for the highest years’ maximum unreported account balances. We will summarize (almost) everything about the FBAR, along with identifying key provisions of the FinCEN instructions guide.
What to Know About FBAR Reporting
The following sections are reproduced from the FinCEN website:
FinCEN Form 114, Report of Foreign Bank and Financial Accounts, is used to report a financial interest in or signature authority over a foreign financial account. The FBAR must be received by the Department of the Treasury on or before April 15th of the year immediately following the calendar year being reported. FinCEN will grant filers failing to meet the FBAR annual due date of April 15th an automatic extension to October 15th each year. Accordingly, specific requests for this extension are not required.
Who Must File an FBAR?
A United States person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. See General Definitions, to determine who is a United States person.
General FBAR Definitions
The following is a list of the general FBAR definitions as provided in the instructions:
A financial account includes, but is not limited to, a securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution (or other person performing the services of a financial institution). A financial account also includes a commodity futures or options account, an insurance policy with a cash value (such as a whole life insurance policy), an annuity policy with a cash value, and shares in a mutual fund or similar pooled fund (i.e., a fund that is available to the general public with a regular net asset value determination and regular redemptions).
A financial account type listed above owned jointly by two or more persons.
Foreign Financial Account
A foreign financial account is a financial account located outside of the United States. For example, an account maintained with a branch of a United States bank that is physically located outside of the United States is a foreign financial account. An account maintained with a branch of a foreign bank that is physically located in the United States is not a foreign financial account.
A United States person has a financial interest in a foreign financial account for which: 1. the United States person is the owner of record or holder of legal title, regardless of whether the account is maintained for the benefit of the United States person or for the benefit of another person; or the owner of record or holder of legal title is one of the following:
a. An agent, nominee, attorney, or a person acting in some other capacity on behalf of the United States person with respect to the account;
b. A corporation in which the United States person owns directly or indirectly: (i) more than 50 percent of the total value of shares of stock or (ii) more than 50 percent of the voting power of all shares of stock;
c. A partnership in which the United States person owns directly or indirectly:
(i) an interest in more than 50 percent of the partnership’s profits (e.g., distributive share of partnership income taking into account any special allocation agreement) or
(ii) an interest in more than 50 percent of the partnership capital; d. A trust of which the United States person:
(i) is the trust grantor and
(ii) has an ownership interest in the trust for United States federal tax purposes. See 26 U.S.C. sections 671-679 to determine if a grantor has an ownership interest in a trust; e. A trust in which the United States person has a greater than 50 percent present beneficial interest in the assets or income of the trust for the calendar year; or f. Any other entity in which the United States person owns directly or indirectly more than 50 percent of the voting power, total value of equity interest or assets, or interest in profits.
A person means an individual (including a minor child) and legal entities including, but not limited to, a limited liability company, corporation, partnership, trust, and estate.
Signature authority is the authority of an individual (alone or in conjunction with another individual) to control the disposition of assets held in a foreign financial account by direct communication (whether in writing or otherwise) to the bank or other financial institution that maintains the financial account. See Exceptions, Signature Authority.
For FBAR purposes, the United States includes the States, the District of Columbia, all United States territories and possessions (e.g., American Samoa, the Commonwealth of the Northern Mariana Islands, the Commonwealth of Puerto Rico, Guam, and the United States Virgin Islands), and the Indian lands as defined in the Indian Gaming Regulatory Act. References to the laws of the United States include the laws of the United States federal government and the laws of all places listed in this definition. United States Person.
United States person means United States citizens (including minor children); United States residents; entities, including but not limited to, corporations, partnerships, or limited liability 6 companies created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States. Note. The federal tax treatment of an entity does not determine whether the entity has an FBAR filing requirement. For example, an entity that is disregarded for purposes of Title 26 of the United States Code must file an FBAR, if otherwise required to do so. Similarly, a trust for which the trust income, deductions, or credits are taken into account by another person for purposes of Title 26 of the United States Code must file an FBAR, if otherwise required to do so.
Filing Information for FBAR
When it comes to Filing the FBAR, there is a lot of information for filer to know about it. Here are some of the basics as provided by FinCEN.
When and Where to File
The FBAR is an annual report and must be filed on or before April 15th of the year following the calendar year being reported. The FBAR must be filed electronically through FinCEN’s BSA E-Filing System…
Note: The FBAR filing deadline will follow the Federal income tax due date guidance, which notes that when the Federal income tax due date falls on a Saturday, Sunday, or legal holiday, a return is considered timely filed if filed on the next succeeding day that is not a Saturday, Sunday, or legal holiday.
Extension of Time to File
FinCEN will grant filers failing to meet the FBAR annual due date of April 15th an automatic extension to October 15th each year. Accordingly, specific requests for an extension are not required.
Record Keeping Requirements
Persons required to file an FBAR must retain records that contain the name in which each account is maintained, the number or other designation of the account, the name and address of the foreign financial institution that maintains the account, the type of account, and the maximum account value of each account during the reporting period.
The records must be retained for a period of 5 years from April 15th of the year following the calendar year reported, or the date filed if after April 15th, and must be available for inspection as provided by law. Retaining a copy of the filed FBAR can help to satisfy the record keeping requirements.
An officer or employee who files an FBAR to report signature authority over an employer’s foreign financial account is not required to personally retain records regarding these accounts.
Recording information: Complete each FBAR by providing as much information as possible. Although all items should be completed fully and accurately, items marked with an asterisk (*) in the instructions must be completed. NOTE: Throughout these instructions th
Monetary Amounts Reported on FBAR
Depending on the type of account and availability of records, it can sometimes be difficult for filers to obtain all the information they need. FinCEN and the IRS do have specific requirements when it comes to reporting the values:
When recording the maximum value of accounts, record all amounts as U.S. Dollar amounts rounded up to the next whole dollar. The amount $15,265.25 would be recorded as $15,266. The maximum value of the account can be determined using the following steps.
NOTE: After determining the value of the account, as described below, if the value results in a negative (minus) value, enter zero (0) in item 15, “Maximum account value.”
Step 1. Determine the maximum value of each account (in the currency of that account) during the calendar year being reported. The maximum value of an account is a reasonable approximation of the greatest value of currency or nonmonetary assets in the account during the calendar year. Periodic account statements may be relied on to determine the maximum value of the account, provided that the statements fairly reflect the maximum account value during the calendar year. For Item 15, if the filer had a financial interest in more than one account, each account must be valued separately. For an account denominated in U.S. Dollars, the maximum value of the account is the largest U.S. Dollar value of the account during the report year.
Step 2. In the case of non-United States currency, convert the maximum account value for each account into United States dollars. Convert foreign currency by using the Treasury’s Financial Management Service rate (select Exchange Rates under Reference & Guidance at www.fms.treas.gov) for the last day of the calendar year. If no Treasury Financial Management Service rate is available, use another verifiable exchange rate and provide the source of that rate. In valuing currency of a country that uses multiple exchange rates, use the rate that would apply if the currency in the account were converted into United States dollars on the last day of the calendar year. If the maximum account value of a single account or aggregate of the maximum account values of multiple accounts exceeds $10,000, an FBAR must be filed. An FBAR is not required to be filed if the person did not have $10,000 of maximum value or aggregate maximum value in foreign financial accounts at any time during the calendar year.
For United States persons with a financial interest in or signature authority over fewer than 25 accounts that are unable to determine if the aggregate maximum account values of the accounts exceeded $10,000 at any time during the calendar year, complete the appropriate Part II, III, IV, or V section for each of these accounts and check the “amount unknown” box, item 15a.
Exceptions to FBAR
There are certain exceptions to FBAR filing as well:
Certain Accounts Jointly Owned by Spouses
The spouse of an individual who files an FBAR is not required to file a separate FBAR if the following conditions are met:
(1) all the financial accounts that the non-filing spouse is required to report are jointly owned with the filing spouse;
2) the filing spouse reports the jointly owned accounts on a timely filed FBAR electronically signed; and
(3) the filers have completed and signed Form 114a, “Record of Authorization to Electronically File FBAR’s” (maintained with the filers’ records). Otherwise, both spouses are required to file separate FBARs, and each spouse must report the entire value of the jointly owned accounts. See instructions for specific items, Part III, Items 25-33. Consolidated FBAR. If a United States person that is an entity is named in a consolidated FBAR filed by a greater than 50 percent owner, such entity is not required to file a separate FBAR. See Explanations for Specific Items, Part V.
Correspondent or nostro accounts (which are maintained by banks and used solely for bank-to-bank settlements) are not required to be reported. Governmental Entity. A foreign financial account of any governmental entity of the United States (as defined above) is not required to be reported by any person. For purposes of this form, governmental entity includes a college or university that is an agency of, an instrumentality of, owned by, or operated by a governmental entity. For purposes of this form, governmental entity also includes an employee retirement or welfare benefit plan of a governmental entity.
International Financial Institution
A foreign financial account of any international financial institution (if the United States government is a member) is not required to be reported by any person.
IRA Owners and Beneficiaries
An owner or beneficiary of an IRA is notrequired to report a foreign financial account held in the IRA. Participants in and Beneficiaries of Tax-Qualified Retirement Plans. A participant in or beneficiary of a retirement plan described in Internal Revenue Code section 401(a), 403(a), or 403(b) is notrequired to report a foreign financial account held by or on behalf of the retirement plan.
Individuals who have signature authority over, but no financial interest in, a foreign financial account are not required to report the account in the following situations:
An officer or employee of a bank that is examined by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, or the National Credit Union Administration is not required to report signature authority over a foreign financial account owned or maintained by the bank.
An officer or employee of a financial institution that is registered with and examined by the Securities and Exchange Commission or Commodity Futures Trading Commission is not required to report signature authority over a foreign financial account owned or maintained by the financial institution.
An officer or employee of an Authorized Service Provider is not required to report signature authority over a foreign financial account that is owned or maintained by an investment company that is registered with the Securities and Exchange Commission. Authorized Service Provider means an entity that is registered with and examined by the Securities and Exchange Commission and provides services to an investment company registered under the Investment Company Act of 1940.
An officer or employee of an entity that has a class of equity securities listed (or American depository receipts listed) on any United States national securities exchange is not required to report signature authority over a foreign financial account of such entity. 5. An officer or employee of a United States subsidiary is not required to report signature authority over a foreign financial account of the subsidiary if its United States parent has a class of equity securities listed on any United States national securities exchange and the subsidiary is included in a consolidated FBAR report of the United States parent. An officer or employee of an entity that has a class of equity securities registered (or American depository receipts in respect of equity securities registered) under section 12(g) of the Securities Exchange Act is not required to report signature authority over a foreign financial account of such entity.
Trust Beneficiaries. A trust beneficiary with a financial interest described in section (2)(e) of the financial interest definition is not required to report the trust’s foreign financial accounts on an FBAR if the trust, trustee of the trust, or agent of the trust: (1) is a United States person and (2) files an FBAR disclosing the trust’s foreign financial accounts. United States Military Banking Facility. A financial account maintained with a financial institution located on a United States military installation is not required to be reported, even if that military installation is outside of the United States.
31 U.S. Code § 5314 – Records and reports on foreign financial agency transactions
Section 5314 of Title 31 refers to the statute responsible for FBAR reporting:
(a) Considering the need to avoid impeding or controlling the export or import of monetary instruments and the need to avoid burdening unreasonably a person making a transaction with a foreign financial agency, the Secretary of the Treasury shall require a resident or citizen of the United States or a person in, and doing business in, the United States, to keep records, file reports, or keep records and file reports, when the resident, citizen, or person makes a transaction or maintains a relation for any person with a foreign financial agency. The records and reports shall contain the following information in the way and to the extent the Secretary prescribes:
(1) the identity and address of participants in a transaction or relationship.
(2) the legal capacity in which a participant is acting.
(3) the identity of real parties in interest.
(4) a description of the transaction.
(b) The Secretary may prescribe—
(1)a reasonable classification of persons subject to or exempt from a requirement under this section or a regulation under this section;
(2) a foreign country to which a requirement or a regulation under this section applies if the Secretary decides applying the requirement or regulation to all foreign countries is unnecessary or undesirable;
(3) the magnitude of transactions subject to a requirement or a regulation under this section;
(4) the kind of transaction subject to or exempt from a requirement or a regulation under this section; and
(5) other matters the Secretary considers necessary to carry out this section or a regulation under this section. (c)A person shall be required to disclose a record required to be kept under this section or under a regulation under this section only as required by law.
FBAR Regulations 1010.350 Reports of foreign financial accounts (in Part)
While the Regulations may be outdated, they are still in effect. Here are some of the key aspects of the regulation:
(a) In general
Each United States person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country shall report such relationship to the Commissioner of Internal Revenue for each year in which such relationship exists and shall provide such information as shall be specified in a reporting form prescribed under 31 U.S.C. 5314 to be filed by such persons. The form prescribed under section 5314 is the Report of Foreign Bank and Financial Accounts (TD-F 90-22.1), or any successor form. See paragraphs (g)(1) and (g)(2) of this section for a special rule for persons with a financial interest in 25 or more accounts, or signature or other authority over 25 or more accounts.
(b) United States Person
For purposes of this section, the term “United States person” means –
(1) A citizen of the United States;
(2) A resident of the United States. A resident of the United States is an individual who is a resident alien under 26 U.S.C. 7701(b) and the regulations thereunder but using the definition of “United States” provided in 31 CFR 1010.100(hhh) rather than the definition of “United States” in 26 CFR 301.7701(b)-1(c)(2)(ii); and
(3) An entity, including but not limited to, a corporation, partnership, trust, or limited liability company created, organized, or formed under the laws of the United States, any State, the District of Columbia, the Territories and Insular Possessions of the United States, or the Indian Tribes.
(c) Types of Reportable Accounts
For purposes of this section –
(1) Bank account
The term “bank account” means a savings deposit, demand deposit, checking, or any other account maintained with a person engaged in the business of banking.
(2) Securities account
The term “securities account” means an account with a person engaged in the business of buying, selling, holding or trading stock or other securities.
(3) Other financial account
The term “other financial account” means –
(i) An account with a person that is in the business of accepting deposits as a financial agency;
(ii) An account that is an insurance or annuity policy with a cash value;
(iii) An account with a person that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association; or
(iv) An account with –
(A) Mutual fund or similar pooled fund. A mutual fund or similar pooled fund which issues shares available to the general public that have a regular net asset value determination and regular redemptions; or
(B) Other investment fund. [Reserved]
(4) Exceptions for certain accounts
(i) An account of a department or agency of the United States, an Indian Tribe, or any State or any political subdivision of a State, or a wholly-owned entity, agency or instrumentality of any of the foregoing is not required to be reported. In addition, reporting is not required with respect to an account of an entity established under the laws of the United States, of an Indian Tribe, of any State, or of any political subdivision of any State, or under an intergovernmental compact between two or more States or Indian Tribes, that exercises governmental authority on behalf of the United States, an Indian Tribe, or any such State or political subdivision. For this purpose, an entity generally exercises governmental authority on behalf of the United States, an Indian Tribe, a State, or a political subdivision only if its authorities include one or more of the powers to tax, to exercise the power of eminent domain, or to exercise police powers with respect to matters within its jurisdiction.
(ii) An account of an international financial institution of which the United States government is a member is not required to be reported.
(iii) An account in an institution known as a “United States military banking facility” (or “United States military finance facility”) operated by a United States financial institution designated by the United States Government to serve United States government installations abroad is not required to be reported even though the United States military banking facility is located in a foreign country.
(iv) Correspondent or nostro accounts that are maintained by banks and used solely for bank-to-bank settlements are not required to be reported.
(d) Foreign country
A foreign country includes all geographical areas located outside of the United States as defined in 31 CFR 1010.100(hhh).
(e) Financial interest
A financial interest in a bank, securities or other financial account in a foreign country means an interest described in this paragraph (e):
(1) Owner of record or holder of legal title. A United States person has a financial interest in each bank, securities or other financial account in a foreign country for which he is the owner of record or has legal title whether the account is maintained for his own benefit or for the benefit of others. If an account is maintained in the name of more than one person, each United States person in whose name the account is maintained has a financial interest in that account.
(2) Other financial interest. A United States person has a financial interest in each bank, securities or other financial account in a foreign country for which the owner of record or holder of legal title is –
(i) A person acting as an agent, nominee, attorney or in some other capacity on behalf of the United States person with respect to the account;
(ii) A corporation in which the United States person owns directly or indirectly more than 50 percent of the voting power or the total value of the shares, a partnership in which the United States person owns directly or indirectly more than 50 percent of the interest in profits or capital, or any other entity (other than an entity in paragraphs (e)(2)(iii) through (iv) of this section) in which the United States person owns directly or indirectly more than 50 percent of the voting power, total value of the equity interest or assets, or interest in profits;
(iii) A trust, if the United States person is the trust grantor and has an ownership interest in the trust for United States Federal tax purposes. See 26 U.S.C. 671-679 and the regulations thereunder to determine if a grantor has an ownership interest in the trust for the year; or
(iv) A trust in which the United States person either has a present beneficial interest in more than 50 percent of the assets or from which such person receives more than 50 percent of the current income.
(3) Anti-avoidance rule. A United States person that causes an entity, including but not limited to a corporation, partnership, or trust, to be created for a purpose of evading this section shall have a financial interest in any bank, securities, or other financial account in a foreign country for which the entity is the owner of record or holder of legal title.
Civil & Criminal FBAR Penalties
Most of the time, when the US government issues FBAR penalties — they are civil in nature. Criminal FBAR penalties are rare, and they tend to only rear their ugly head in situations in which a taxpayer is being investigated for other crime-related issues such as money laundering, smurfing, structuring, and tax evasion. Stated another way, just having a few unreported foreign accounts and possibly making some mistakes on filing Schedule B and other related forms is not a criminal situation per se – even if the IRS alleges it is “willful” (civil willful and criminal willfulness are not the same thing).
31 USC 5321 et seq. Civil FBAR Penalties: Willful or Non-Willful
The two types of civil FBAR penalties are: willful and non-willful.
While the non-willful penalties are more common — and range extensively on how they are assessed and enforced — they are generally less brutal than the willful penalty counterpart.
Taxpayer Tip: Criminal vs. Civil Willfulness
One rather distasteful strategy that some fear-mongering attorneys use is to scare unsuspecting taxpayers into believing that if they are willful, then they are criminals and that means they may be subject to incarceration. Civil willfulness is not the same as criminal willfulness — and in order to be criminally willful, there still must be an element of intent and the government must prove the violation beyond a reasonable doubt — which is not required for a civil willful penalty.
Non-Willful FBAR Penalties
The penalty generally starts at $10,000 per violation, although technically the $10,000 penalty is the “maximum violation amount.” Even though the $10,000 penalty is the maximum penalty per violation, penalties tend to start based on that $10,000 value — no matter what the facts and circumstances are.
IRS agents and examiners have discretion to reduce or minimize the penalty.
The $10,000 adjusts for inflation.
What does Non-Willful Mean?
There is no direct definition of the term non-willful. There is no bright-line test that can be used to punch in the facts and derive a conclusion as to whether or not a taxpayer was non-willful. Instead, it is based on the Totality of the Circumstance analysis.
While at first glance this may not seem too complicated, the IRS has done its part to make it incredibly ambiguous and difficult, especially since the term “violation” can have different meanings and outcomes.
What does Per Violation Mean?
The FBAR range for violations of foreign account reporting compliance is as follows:
- warning letter in lieu of penalty;
- a $10,000 penalty that encompasses all the violations for all years;
- a $10,000 per year; or
- a $10,000 penalty per violation per year.*
*The $10,000 penalty per violation per year caps at 50% value of the account values (see IRM).
What do the Courts Say?
When it comes to non-willful violations, oftentimes penalties will hinge on a nuance. And, when it comes to the FBAR, the nuance is what is defined as a violation. Does a non-willful FBAR violation mean that the form was not filed and the taxpayer should be penalized for not filing the form — or does it mean that each account was not reported, and therefore the taxpayer should be subject to a penalty for each account that was not properly reported?
While courts are split, there have been four recent decisions that all favor the taxpayer and the non-willful FBAR penalty being limited to a “per form” and not a “per account” violation.
Here are four recent cases and links to our articles summarizing each case:
- Kaufmnan (District Court)
- Giraldi (District Court)
- Bittner (District Court)
- Boyd (Court of Appeals)
Willful FBAR Penalties
When the IRS can prove that the taxpayer was willful, the penalties are much more damaging and can reach upwards of 50% of the maximum account value per year (but the total penalty for all years is limited to 100% value).
A recent court of Federal Court of Claims Appeal case made it even easier for the US government to prove willfulness by proving reckless disregard — although it should be noted that in that case, the Taxpayer had entered OVDP, been assessed a penalty, dropped out of the program, and never even paid the Penalty.
Lower Standard of FBAR Willfulness
When it comes to civil FBAR willfulness penalties, intent is not required. In fact, actual knowledge is not necessarily required either. This can make it incredibly difficult when it comes time to evaluate a taxpayer’s options on how to deal with the penalty.
- Reckless Disregard (Willful): Which means the person acted without actual intent.
- Willfully Blind (Willful): Which means the person did not actually know of the violation at the time it happened
Why is this important?
The reason this is so important is because even though there is no bright-line test to determine willful from non-willful, agents, and examiners may differ on their analyses and conclusions as to what would be considered aggravated negligence (but still non-willful) and what may be considered reckless disregard (willful) for example.
What if You Were Assessed FBAR Penalties?
If the IRS assessed FBAR penalties against you, it is important to work to get those penalties removed or minimized as quickly as possible. The US government generally has two years to bring a lawsuit to enforce the penalty — and since it is not a tax form, Tax Court is unfortunately not an option in terms of litigating the penalty. Instead, the taxpayer will have to duke it out with the US government in District Court or the Court of Federal Claims.
FBAR Enforcement is a Key Priority
In conclusion, the US government continues to assess and enforce FBAR penalties as a key compliance initiative. If you have been hit with penalties or are concerned you will be penalized, you should consider one of the amnesty programs to get into compliance — if you have not been penalized or are currently not under audit (or under ancillary investigations).
Golding & Golding: About Our International Tax Law Firm
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Contact our firm today for assistance.