FBAR Instructions: The IRS and FinCEN instructions for filing the FBAR can be confusing. It is required to be filed by US Persons, but US persons includes individuals, trusts, entities and more. We have worked with thousands of clients on matters involving the FBAR, so we wanted to throw our hat in the ring and give you our version of the FBAR instructions, and a guide to 25 important FBAR reporting facts.
The first part of the this article summarizes the steps for filing, and the second part provides you with 25 important FBAR facts you should know.
10-Step FBAR Instructions Guide
These are instructions to assist you with understanding the FBAR, if you are filing for the current year not out of compliance for prior years.
It is not intended for you to rely (or your tax professional) in actually filing the form. The summary is basic, and there are many other factors that may impact your specific filing, especially if it is a late filing.
Step 1 – Are you a U.S. Person?
The form must be filed by U.S. persons. In order to confuse you, the IRS does not define US person to mean the same as U.S. Citizen. A US person typically falls into three categories: U.S. Citizen, Legal Permanent Resident, Foreign National who meets the IRS Substantial Presence Test (typically individuals on H-1B Visa, L-1 Visas, and E-2 Visas – although it is not a requirement to have one of these Visas).
If you are a US person, then you move on to step two.
Step 2 – Do You Meet the Threshold Requirements?
The threshold requirements are relatively simple. On any day of the year, if you aggregated (totaled) the maximum balances of all of your foreign accounts, does that total amount exceed $10,000? If it does, then you have to file the form. The most important thing to remember is you do not need to have more than $10,000 in each account; rather, it is an annual aggregate total of the maximum balances of all the accounts.
Step 3 – Identify What is an Account
This is one of the more difficult parts of the job. That is because when a person thinks of financial accounts, they typically think of a “Bank Account.” It makes sense, since the word “Bank” is included directly in the FBAR definition. Therefore, many people (understandably so) will only focus just on bank accounts. Unfortunately, you have to include all financial accounts unless it is otherwise excluded (and there are only a few exclusions).
Some examples of other accounts include:
- Stock accounts that have an Account Number
- Private Pension Accounts
- Investment Accounts
- Foreign Mutual Funds and ETF Accounts
- Foreign Life Insurance that has a Surrender Value
Step 4 – How Many Accounts Do You Have?
This is an important question, because if you have more than 25 accounts then you do not have to list all of the accounts on the actual form. Rather, you maintain your own records so that the IRS contacts you on a future date, you will have that information available.
Like most people, if you have less than 25 accounts then you would report all the accounts on the FBAR. It does not matter if your account has a zero balance, and it does not matter if the account was “dormant.” If the account is open and you are listed on the account, you have to report it.
Step 5 – What is Your relationship to the Account?
There are different sections of the FBAR. The sections are broken down into three main categories, which include ownership of the Account, co-ownership or joint ownership of the account, and signature authority and/or no monetary interest in the account.
The latter category typically includes people who may have been included on the account in emergency when a parent or elderly individual is getting on age. Also, if you are an employee and you have signature authority, that is included as well.
Step 6 – Categorize the Different Accounts
It is important that you prepare separate categories to identify each different type of account. That is to make sure that, for example, you do not report an account you have signature authority in this section that is labeled account ownership, because then the IRS and U.S. government will believe that the money listed is your own money — as opposed to money for which you may have no ownership over.
Step 7 – Determine the Maximum Balance
You are not required to search for the holy Grail of maximum balances. In other words, you should do the best you can. If you have bank statements for each month, then you would use each month statement to determine what the maximum value is. Likewise, if you have a passport account passbook account and you only get it updated when you enter the bank, then you will have to use the best value you can.
Thereafter, make sure you have identified the maximum balance available for each account.
Step 8 – Use the Exchange Rate
You are not required to use any specific exchange rate, but it has to be reasonable. Both the Department of Treasury and the IRS each publish their own annual exchange rates and feasibly, either exchange-rate would be okay to use.
It is important to make sure that you use the respective exchange rate for the year at issue. Sorry for those of you with euros, rupees or rubles who want to use current exchange rates for prior years.
If you are submitting to one of the offshore disclosure programs or a reasonable cause statement and have to go back six years, then you will have to use the rate that was available six years ago and not today’s rate for filing prior forms.
Step 9 – Complete the FBAR
The FBAR is a relatively simple from a preparation standpoint. In other words, for each account, you will identify the name of the institution, the address and the maximum balance. There’s not much more needed beyond this information.
If you are unable to access the maximum balance or even come up with your best estimate, you can mark off maximum balance unknown for each account of which this is applicable.
Keeping in mind, that the more you marked off “maximum balance unknown” the higher the chance that the FBAR might be further scrutinized. If you are in this type of situation, please be sure to speak with an experienced Offshore Disclosure Lawyer first.
Step 10 – Filing a Late FBAR(s)
At our International Tax Law Firm (Golding & Golding), offshore disclosure is all we do, and this includes Late FBAR Filings, and FATCA Compliance.
Filing a late FBAR outside of the offshore disclosure programs is typically considered a Quiet Disclosure and can land you in some real trouble. If you happen to have zero unreported income (that means zero unreported income from abroad and not zero tax liability) you may be able to qualify for the delinquency procedures, which results in a penalty waiver and a relatively simple submission procedure.
If you have any unreported income, you can still make a reasonable cause submission but it is different. Most individuals prefer to enter one of the approved programs such as streamlined filing compliance procedures or traditional OVDP — you may have multiple options available to you.
Depending on which program you qualify for, and/or which program you prefer to enter, you may qualify for reduced penalty for even a penalty waiver.
We do not recommend making any submission to the Internal Revenue Service regarding any foreign or offshore accounts without at least speaking with an experienced offshore disclosure lawyer first to evaluate and assess your facts.
25 Frequently Asked FBAR Questions
Here are 25 commons questions and answers about the FBAR:
What if I Don’t Have to File a Tax Return?
Even if a person does not have to file a tax return, they may still have to file the annual FBAR.
In other words, having to file the FBAR is not dependent on whether or not the person has to file a U.S. tax return. When the person is considered a U.S. person (more than just individuals) and they meet the threshold requirement for filing the FBAR, then they still have to file the form — even if they do not have to actually file a tax return that year.
When is the FBAR Due?
The FBAR is technically due when a person’s tax return is due, which is generally 4/15 of each year – or whichever date the tax return is due.
Currently, the FBAR is on automatic extension through October 15th (or whichever October filing date the extension falls on in the current year).
For 2019 FBAR – due to a mistake by FinCEN — the filing date wax extended to October 31.
How do I File for an FBAR Extension?
The FBAR extension is automatic, so that no form is required to extend the FBAR filing due date.
What if I owned the Foreign Accounts Before Coming to the U.S.?
This is a very common question/concern.
When a person files the annual FBAR, they are providing the U.S. government with a snapshot of their foreign accounts.
It does not matter if the account predated the person becoming a U.S. person.
Thus, whether or not the overseas account was opened before or after becoming a U.S. person, it is reportable on the FBAR.
Do I File FBAR if I Live Outside of the U.S.?
Even when a person resides outside of the United States, they are still subject to the same FBAR reporting requirements as U.S. persons who reside inside the United States.
But What if the Foreign Money does Not Belong to Me?
Whether or not the money belongs to the filer is not dispositive of whether or not the account should be included on the FBAR.
If the account is under the filer’s name, then presumably it is included on the FBAR — although ownership of the money may impact issues involving penalty mitigation.
What if None of the Foreign Accounts Exceed $10,000?
This is also a very common question.
There is no requirement that the specific account balance exceed $10,000.
Rather, the determining factor is whether the annual aggregate total of all accounts combined exceeds $10,000 on any given day of the year.
If so, then all of the accounts should be included on the FBAR, which needs to include all dormant accounts as well.
What if None of the Accounts Generate Income?
The U.S. government does not require that the foreign accounts generate any income in order for the account to be included on the FBAR.
Therefore, even if the account does not generate any income, it should still be included on the FBAR.
What if I Don’t Know the Exact Account Balances?
In general, it is better to report the accounts with the best estimated maximum balance, than to mark off the “maximum balance unknown” box — or even worse, not filing the FBAR at all.
Of course, the filer should not completely guess or fabricate the balance amount. If the exact maximum balance is unknown and a reasonable estimate cannot be made, then the filer may indicate the box that says maximum value unknown.
What if my Minor Child has Foreign Accounts?
Minor children must also file the FBAR. There is no current exception to FBAR filing for minors.
Is a Foreign Pension Reportable?
Yes – in general, foreign pensions are reportable.
Foreign pension accounts would qualify as foreign financial accounts and therefore would be included on the FBAR.
Is a Foreign Life Insurance Policy Reportable?
A foreign life insurance policy is reportable when it has a surrender value or cash value.
It is important to note that the reportable value would be the surrender or cash value and not the policy face value — since the policy face value is not the current maximum value.
Are Foreign Investment Accounts Reportable?
Yes. and we realize it can be very difficult, especially in situations where a person is trying to decipher the maximum value of a foreign mutual fund or SICAV in accordance with the NAV.
In this type of situation, the best available value would have to do.
Is Foreign Stock Reportable on the FBAR?
Stock certificates are generally not included on the FBAR. Conversely, stock accounts are reported on the FBAR.
Is Foreign Cryptocurrency on the FBAR?
There is no definitive guidance on whether cryptocurrency or other virtual currency is included on the FBAR.
You could find other resources we have prepared for FBAR cryptocurrency to get a better idea of whether you may consider reporting it or not.
Which FBAR Exchange Rate do I Use?
FBAR filers can use any exchange rate that is considered reasonable.
The two most common exchange rates filers use are the average exchange rates published by the Internal Revenue Service and the exchange rates published by the Department of Treasury.
What if I already Filed Form 8938?
The Form 8938 is similar but not identical to the FBAR.
Just because a person filed the Form 8938 in a given year does not exempt them from filing the FBAR in the same year.
Some accounts are required to be disclosed on both forms, while other accounts and assets may only be required on one of the forms — and duplicate reporting is common.
Does a Business file FBAR?
Yes, businesses such as corporations, partnerships, and joint ventures may also have to file the FBAR if they meet the threshold requirement for reporting.
Does a Trust file FBAR?
Yes, if a trust has foreign account(s) associated with it, then the trust must disclose the foreign account(s) on the FBAR.
Does an Estate file FBAR?
Yes – and with estates, it can get very complicated because there may be an FBAR requirement for the decedent, the estate, and also the beneficiary.
What if a Decedent Had Foreign Accounts?
If the decedent had foreign accounts, it is important to try to determine if the decedent also had an FBAR filing requirement — and if so, was the decedent in compliance for the prior years?
Ideally, this should be completed before filing the decedent’s final tax return.
Non-Willful vs. Willful FBAR Penalty
The majority of FBAR penalties are civil in nature (versus criminal).
Civil penalties can be broken down further into non-willful and willful FBAR penalties.
While the penalties can be tough — and online fear mongering is rampant — it is important to note that not everyone gets hit with willfulness penalties.
We have separate resources to guide you on FBAR Penalties.
Can I Dispute the FBAR Penalty in Tax Court?
The FBAR is not a tax form. Rather, it is an international reporting form and the penalties associated with the FBAR are not tax liabilities.
While you cannot dispute the FBAR penalty in Tax Court, you have the right to pursue the matter in Federal Court.
What about FBAR Double-Counting?
This is probably the single most common question we receive.
Let’s say you have $100,000 in an account that you transfer five times, into five different accounts. On the FBAR, it will look like you have $500,000, instead of $100,000.
Remember, the FBAR is not used to report the total amount of money you had overseas. Rather, it is used to report the maximum value of the different accounts you had.
It is common to transfer money over different accounts and that does not presume that the total balances on the FBAR represents the total amount of money the filer has.
What if I Made a Mistake on the FBAR?
It depends on the type of mistake. For example, was it a mistake in reporting the balance or were accounts completely missed?
If it was inaccurate reporting, then the level of the inaccuracy may determine what steps the filer should take to resolve the inaccuracy.
For missed accounts, the filer will generally have to go back and resolve the issue with one of the FBAR Amnesty Programs.
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