The Foreign Bank Account Report or FBAR is an international information reporting form under Title 31. It is also known as FinCEN Form 114. This reporting requirement has nothing to do with taxes and is rather used by US citizens to report the certain foreign financial assets and accounts to the IRS.
The fact that the word “foreign account” encompasses much more than just bank accounts further complicates the situation. It also contains foreign Pension Account, possibly cryptocurrency wallets and exchanges, and overseas life insurance accounts. As such, the penalties of not filing an FBAR and missing some bank accounts or inaccurately reporting some foreign financial information are no joke. Thus, if you don’t want to pay a huge amount of penalty, you should look out for these common FBAR mistakes:
- Failed to file an FBAR
- Misunderstood the $10,000 Filing Threshold
- Failed to Report Life Insurance, Retirement, and Other Nontraditional Financial Accounts
- Failed to report beneficial ownership
- Filing of joint accounts by spouse
- Age cut off for FBAR filing
- Failed to comply with Bank Secrecy Act record Retention Requirements
Failed to File an FBAR
One of the most common FBAR mistakes is failure to file at all. Americans living and working outside the United States, foreign residents residing in the US, new immigrants, and U.S. minor children who received gifts or bequests from their overseas parents are all likely to be uninformed of their FBAR filing duties.
Most of the time, when they learn about the FBAR and the penalties that come with it, they often panic and opt to wait it out to see whether the IRS catches them. This course of action is highly discouraged because the penalty for willful and non-willful offenses differ significantly. As such, you will become willful when you try to hide on purpose. Also, foreign-held crypto might be reported on an FBAR.
Misunderstood the $10,000 Filing Threshold
If the highest reported balance of a certain foreign financial account exceeds $10,000 in the annual aggregate total of all accounts, you must file an FBAR. Always remember to look at the highest reported balance and NOT the year-end balance!
The reporting threshold is calculated by adding the highest reported balance of all foreign financial accounts that a U.S. person owned or had signing authority for the calendar year. Thus, the threshold is not determined on an account-by-account basis, it is the total value of all your accounts.
Say, for instance, you have $4,000 under your IRA and $9,000 in your personal savings account. Adding them together will make $13,000, which means you will have to file an FBAR on both accounts.
Failed to Report Life Insurance, Retirement, and Other Nontraditional Financial Accounts
When you say “financial account,” its definition is wider than a bank savings account or traditional checking. As a matter of fact, it also includes certificates of deposit, inter alia, passbook accounts, security investment accounts, mutual funds or similar pooled funds, and accounts with a person who acts as a broker-dealer for futures or options transactions.
Foreign retirement accounts are required to be reported on FBARs under a variety of conditions. Foreign financial accounts held by an IRA, as well as participants in certain tax-qualified retirement plans, are subject to some restrictions. If in doubt, report the account to avoid hefty penalties.
Failed to Report Beneficial Ownership
as a general rule, any U.S. citizen who has “signature or other authority” over, or is the owner of the record of or holder of legal title to, a foreign financial account must file FBAR — if the total value of that individual’s or entity’s foreign accounts is beyond $10,000 during the calendar year.
According to the regulations, the criteria for whether someone has a signature or other authority over an account is whether the foreign financial institution will “act upon a direct message from that individual on the disposal of assets in the account.” Also, don’t forget that some foreign assets must be reported on an FBAR and Form 8938.
The obligation to file an FBAR extends well to any U.S. person with a “financial interest” in a foreign financial account is required to file an FBAR, including signatories and legal account holders.
Filing of Joint FBARs by Spouse
Spouses are allowed to file a joint FBAR in limited circumstances. According to the FBAR instruction, one spouse can file on behalf of the other if all these conditions are met:
- The entire financial accounts that the non-filing spouse has to report are jointly owned with the filing spouse.
- The filers have completed and signed FinCEN Form 114a “Record of Authorization to Electronically File FBARs.”
- The filing spouse reports the jointly owned accounts on a timely filed FBAR electronically signed.
In other words, if the non-filing spouse owns or has signature authority over an account that is not needed to be reported by the filing spouse, both spouses must file separate FBARs. However, if you and your spouse would like to avoid the risk that the Internal Revenue Service might later determine that either of you failed to meet the FBAR requirements, it is better to practice filing separate FBARs. The FBAR requirements are bit more complicated with a joint account with a non-US citizen.
Age Cut Off for FBAR filing
Filing FBAR requires no age cutoff. A U.S. minor who owns foreign financial accounts that meet the $10,000 aggregate threshold is generally responsible for filing his or her own FBAR. If a kid is unable to submit an FBAR for any reason, such as age, the child’s parent, guardian, or other legally responsible people must do so on his or her behalf.
Failed to Comply with Bank Secrecy Act Record Retention Requirements
Aside from filing an FBAR, a US person who is subject to the FBAR reporting requirements must also keep certain account information and records relating to foreign financial accounts for a period of five years.
The following are the records that must be kept:
- The name of the account holder
- The account number
- The name and address of the financial institution
- The type of account
- The maximum value of each account during the reporting period
Thus, failure to keep adequate foreign account records carries the same penalties as failing to file a timely and accurate FBAR.