Tuesday, February 25, 2014

Are You Required To Report Your Foreign Bank and Financial Accounts?

Reporting Your Foreign Bank and Financial Accounts:

There has been much discussion about the requirements for a U.S. person to report their foreign bank and financial accounts.  There is much confusion as the requirements are relatively new and, of course, undergoing further changes.  Even the name "U.S. person" is an odd term and so are many of the requirements but the bottom line is we want to meet our obligations as U.S. persons.

Reason for Reporting Requirements:

In this case we are talking about just reporting requirements.  That means the FBAR and FATCA requirements are requirements to report certain foreign bank and financial accounts under certain circumstances.  The reason behind the reporting requirement relates to the requirement on U.S. income tax returns to report all of your worldwide income.  So rest assured that if you report all your worldwide income on your U.S. income tax returns you should have no problems with your U.S. income tax returns.  The requirement to report your foreign accounts is designed by the U.S. government to uncover banks and financial institutions in which people are hiding money and worldwide income and thus cheating on their U.S. income tax returns.

At an IRS seminar I attending this summer it was explained the IRS is getting very good at finding these financial institutions and U.S. persons with accounts in them.  One objective of the reporting requirement is not necessarily to get you who report your worldwide income but to find where the guy down the street is hiding his worldwide income.

The Reporting Requirements:

The requirements to report foreign bank and other financial accounts come under two different requirements.  One is the Report of Foreign Bank and Financial Accounts (FBAR) and the other is the Foreign Account Tax Compliance Act (FATCA).

FBAR:


Beginning with the FBAR > Per the IRS: If you have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, exceeding certain thresholds, the Bank Secrecy Act may require you to report the account yearly to the Internal Revenue Service by filing electronically a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR). See the ‘Who Must File an FBAR’ section below for additional criteria.

This means there are new forms for the FBAR.  According to the IRS the current FBAR Guidance is as follows:

FinCEN introduces new forms


On September 30, 2013, FinCEN posted, on their internet site, a notice announcing FinCEN Form 114, Report of Foreign Bank and Financial Accounts (the current FBAR form). FinCEN Form 114 supersedes TD F 90-22.1 (the FBAR form that was used in prior years) and is only available online through the BSA E-Filing System website. The system allows the filer to enter the calendar year reported, including past years, on the online FinCEN Form 114. It also offers an option to “explain a late filing,” or to select “Other” to enter up to 750-characters within a text box where the filer can provide a further explanation of the late filing or indicate whether the filing is made in conjunction with an IRS compliance program.
On July 29, 2013, FinCEN posted a notice on their internet site that introduced a new form to filers who submit FBARs jointly with spouses or who wish to have a third party preparer file their FBARs on their behalf. The new FinCEN Form 114aRecord of Authorization to Electronically File FBARs, is not submitted with the filing but, instead, is maintained with the FBAR records by the filer and the account owner, and made available to FinCEN or IRS on request.

Filing deferral for certain individuals with signature authority only, effective through June 30, 2015

FinCEN Notice 2013-1 extended the due date for filing FBARs by certain individuals with signature authority over, but no financial interest in, foreign financial accounts of their employer or a closely related entity, to June 30, 2015.
Chronology Pertaining to This Filing Deferral
May 31, 2011 (rev. June 6, 2011)
FinCEN Notice 2011-1 provides filing extension to June 30, 2012 extension for:
  • An employee or officer of an entity under 31 CFR § 1010.350(f)(2)(i)-(v) who has signature or other authority over and no financial interest in a foreign financial account of a controlled person of the entity; or
  • An employee or officer of a controlled person of an entity under 31 CFR § 1010.350(f)(2)(i)-(v) who has signature or other authority over and no financial interest in a foreign financial account of the entity, the controlled person, or another controlled person of the entity.
For purposes of FinCEN Notice 2011-1, a controlled person is a United States or foreign entity more than 50 percent owned (directly or indirectly) by an entity under 31 CFR § 1010.350(f)(2)(i)-(v).
June 17, 2011FinCEN Notice 2011-2 extended due date for filing to June 30, 2012, for certain officers of employees of investment advisors registered with the Securities and Exchange Commission who have signature authority over, but no financial interest in, foreign financial accounts of their employer.
February 14, 2012FinCEN Notice 2012-1 extended the deadline to file to June 30, 2013, for those persons identified in Notice 2011-1 and Notice 2011-2.
December 26, 2012FinCEN Notice 2012-2 further extended the due date for filing to June 30, 2014.
December 17, 2013FinCEN Notice 2013-1 further extended the due date for filing to June 30, 2015.

Who Must File an FBAR

United States persons are required to file an FBAR if:
  1. The United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and
  2. The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.

What is a United States person?  That is a great question.  Here is the guidance from the IRS:

United States person includes U.S. citizens; U.S. residents; entities, including but not limited to, corporations, partnerships, or limited liability 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.

Please note there are exceptions to the reporting requirement.  

Exceptions to the Reporting Requirement

Exceptions to the FBAR reporting requirements can be found in the FBAR instructions. There are filing exceptions for the following United States persons or foreign financial accounts:
  • Certain foreign financial accounts jointly owned by spouses;
  • United States persons included in a consolidated FBAR;
  • Correspondent/nostro accounts;
  • Foreign financial accounts owned by a governmental entity;
  • Foreign financial accounts owned by an international financial institution;
  • IRA owners and beneficiaries;
  • Participants in and beneficiaries of tax-qualified retirement plans;
  • Certain individuals with signature authority over, but no financial interest in, a foreign financial account;
  • Trust beneficiaries (but only if a U.S. person reports the account on an FBAR filed on behalf of the trust); and
  • Foreign financial accounts maintained on a United States military banking facility.
Review the FBAR instructions for more information on the reporting requirement and on the exceptions to the reporting requirement.
Also note the following Reporting and Filing Information from the IRS:

Reporting and Filing Information

A person who holds a foreign financial account may have a reporting obligation even though the account produces no taxable income. The reporting obligation is met by answering questions on a tax return about foreign accounts (for example, the questions about foreign accounts on Form 1040 Schedule B) and by filing an FBAR.
The FBAR is a calendar year report and must be filed on or before June 30 of the year following the calendar year being reported. Effective July 1, 2013, the FBAR must be filed electronically through FinCEN’s BSA E-Filing System. The FBAR is not filed with a federal tax return. A filing extension, granted by the IRS to file an income tax return, does not extend the time to file an FBAR. There is no provision to request an extension of time to file an FBAR.
A person required to file an FBAR who fails to properly file a complete and correct FBAR may be subject to a civil penalty not to exceed $10,000 per violation for nonwillful violations that are not due to reasonable cause. For willful violations, the penalty may be the greater of $100,000 or 50% of the balance in the account at the time of the violation, for each violation.  For guidance when circumstances such as natural disasters prevent the timely filing of an FBAR, see FinCEN guidance,FIN-2013-G002 (June 24, 2013).


The FBAR requirements relate to bank accounts.  The FATCA requirements also include foreign financial assets.

FATCA:

Below are the FATCA requirements per the IRS:
  • U.S. citizens, U.S. individual residents, and a very limited number of nonresident individuals who own certain foreign financial accounts or other offshore assets (specified foreign financial assets) must report those assets
  • Use Form 8938 to report these assets
  • Attach Form 8938 to the annual income tax return (usually Form 1040)
  • Taxpayers with a total value of specified foreign financial assets below a certain threshold do not have to file Form 8938
  • If the total value is at or below $50,000 at the end of the tax year, there is no reporting requirement for the year, unless the total value was more than $75,000 at any time during the tax year
  • The threshold is higher for individuals who live outside the United States
  • Thresholds are different for married and single taxpayers
  • Taxpayers who do not have to file an income tax return for the tax year do not have to file Form 8938, regardless of the value of their specified foreign financial assets.
  • Penalties apply for failure to file accurately
Alert: The reporting requirement for Form 8938 is separate from the reporting requirement for the FinCEN Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”) (formerly TD F 90-22.1). An individual may have to file both forms and separate penalties may apply for failure to file each form.  See the Comparison of filing requirements for further information.
Third-party reporting: Foreign financial institutions may provide to the IRS third-party information reporting about financial accounts, including the identity and certain financial information associated with the account, which they maintain offshore on behalf of U.S. individual account holders.
Application to domestic entities: The IRS anticipates issuing regulations that will require a domestic entity to file Form 8938 if the entity is formed or used to hold specified foreign financial assets and the total asset value exceeds the appropriate reporting threshold. Until the IRS issues such regulations, only individuals must file Form 8938. For more information about domestic entity filing, see Notice 2013-10.

Due to the relative newness of these reporting requirements and ongoing changes this is a very complicated matter related to U.S. income taxes and reporting.  I highly recommend you get help meeting your reporting requirements.

If you want the CPA Superhero to help you feel free to contact me using my information below. You can have a free half hour initial consultation for your current income tax situation.  Tax planning for your retirement involves a consultation fee.


Jeff Haywood, CPA
The CPA Superhero
972-439-1955
jeff.jhtaxes@gmail.com

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My posts contain general information that does not fit every situation, they are not all inclusive, and as always for your tax situation everything "depends on facts and circumstances."  In addition, the information/IRS requirements are always subject to change.  So call me to talk about your specific facts and circumstances and what you want to accomplish.