Expats who have foreign financial accounts may need to look into FBAR requirements. If they meet the eligibility criteria, they must file an annual informational return. Failing to do so correctly and before the FBAR deadline could lead to enormous fees. Luckily, the entire FBAR filing process takes place online and has no tax liability or any type of expenditure.
In order to combat one of the most common tax evasion strategies, the IRS implemented something known as FBAR. This took place in 1970 when the government realized that people may hide income by storing it outside of the U.S. Until then, many taxpayers would have the ability to effectively hide reportable earnings and avoid taxation. Once the Bank Secrecy Act was passed, however, Section 5314 of the U.S. Code Title 31 came into effect. With it, FBAR filing allowed the IRS to track off-shore accounts and inquire about suspicious activity with foreign banks.
What Is FBAR Filing?
FBAR stands for Report of Foreign Bank and Financial Accounts. It is a filing requirement for certain U.S. persons that meet two specific criterions. The first one is that they have an interest or authority over a foreign account/(s). The second one is that the account/(s) have an aggregate value of more than $10,000. There is a fairly long list of exception that applies to certain situations where FBAR filing is unnecessary. Some of the most common ones include accounts:
- Owned by governments;
- Owned by a U.S. military facility;
- Held in retirement plans;
- Held as a part of a trust where the taxpayer is the beneficiary.
In addition, FBAR and all related tax evasion penalties do not apply to you if your spouse already filed. The reason why is that the FBAR filing rules for married couples oblige them to put everything on one form.
Multi-Step Guide to FBAR Filing
Since FBAR filing takes place on a unique online system, it is very different from traditional 1040s and other tax forms. Once you conclude that you meet the requirements, you should begin the process immediately. To do so, there are a few steps that you must take to meet the FBAR deadline.
— Step One: Visit BSA E-Filing
The first thing that you should do is visit the BSA E-Filing website where the FBAR filing procedure commences. You must then choose if you will utilize the online form or a traditional PDF. Both have their upsides and shortcomings. For instance, PDFs will allow you to prepare the FBAR offline but may require additional Adobe software. Similarly, the online form can be submitted fast but cannot be used without the internet.
— Step Two: Gather the Paperwork
Whether you have an interest in only one foreign account or authority over 50 of them, you will file a single FBAR report. The IRS allows the consolidation of the information so that the review process would be simpler. Of course, the more accounts that you have, the longer your FBAR filing process and the final report will be. Before you begin filling things out, gather all the necessary paperwork. This includes all the information about the financial institutions that you have to mention. You will need everything from the monetary values to the physical addresses and account numbers.
— Step Three: Fill Out the FinCEN Report 114
Every FBAR goes through the so-called FinCEN Report 114. The “FinCEN” is a semi-acronym that represents the Financial Crimes Enforcement Network. They oversee the procedure and maintain the aforementioned website. Once you collect your paperwork, you will need to go through the eight basic pages of Report 114. Since the entire venture takes place on the computer, it will be a lot more manageable than paper-filing typical tax forms. Do not forget to pick the highest value of the account, not the latest.
— Step Four: Review and Sign
A lot of taxpayers make the mistake of not proofreading at the end of the FBAR filing. Make sure that you go back and double-check every single line and number. Even a small mistake could be critical and cost you thousands of dollars. Not to mention that the tax evasion penalties are nothing compared to a lifetime of audits that you may face.
FBAR Deadline and Relevant Information
As with the rest of the forms for taxes that concern private U.S. persons, the FBAR deadline falls on April 15. Fortunately, the online system where the entire endeavour takes place makes it easy to submit the report in a timely fashion. Additionally, the IRS recognizes that certain expats may face extenuating circumstances. To better accommodate them, the government allows an FBAR deadline extension that will push it to October 15.
— You Can Take Longer
Unlike other forms, however, the extension on the FBAR deadline is automatic. That means that you do not have to submit any additional forms or transmit estimated payments. After all, FBAR is a purely informational document that will not carry any fees or tax liabilities. While the extension will certainly come in handy, make sure that you do not delay the process too much. Those tax evasion penalties may apply even when your return is just a few days late. Hence why you should treat the October 15th as the final, non-negotiable FBAR deadline.
What About the Exchange Rates?
As most expats know, the vast majority of countries around the world use currencies other than the U.S. Dollar. In fact, only 23 out of 195 nations use dollars as the main means of payment. What does this imply for the FBAR filing process? Well, it will slightly complicate it because you cannot report account balances in foreign denominations. Once you have the highest amount for the year, you will convert it using the online rates.
— What Conversion Rates Do You Use?
The FinCEN advises everyone to utilize theTreasury Reporting Rates of Exchange. A quick visit to their website will let you see the exact relationship between the U.S. Dollar and all other currencies. That way, you can submit before the FBAR deadline and ensure that your numbers are correct. Remember, the IRS compares the numbers that you showcase to the figures that the financial institution reports. If you make an incorrect conversion, you could face tax evasion penalties due to the sensitive nature of the situation.
Do Cryptocurrencies Go With FBAR Filing?
After the unbelievable boom of cryptocurrency assets in 2017, the number of expats who hold virtual coins increased substantially. Given the type of currency and the fact that the situation is unprecedented, many fillers face a tricky situation. Do you need to include your cryptocurrency with the FBAR? After all, FBAR filing applies to account values. That means that there might be other assets of value that have to be mentioned, not just money.
— The FinCEN Sets the Record Straight
Luckily, in June of this year, the FinCEN came out to make the necessary clarifications. They made it known that cryptocurrency holders do not need to worry about the FBAR deadline just yet. In fact, they do not see digital coins as assets that meet the necessary definition. Their citing for the finding relates to paragraph C in Section 1010.350 of the 31st title of the Code. It is important that you note how FinCEN’s response in June is not a timeless solution. In translation, there may be changes that will make cryptocurrency includable later on. For now, however, they do not belong on any FBAR forms.
Tax Evasion Penalties
The next major concern in the FBAR area relates to the tax evasion penalties. As of 2019, there are two types of violators that the IRS divides into willful and non-willful. While neither of the categories is good, anyone who violates will probably want to do it non-willfully. These are people who did not intend to do anything fraudulent. Their FBAR filing mistakes are usually due to negligence or simple math errors.
With willful taxpayers, on the other hand, there was a clear-cut intention to commit tax evasion. This could include understating numbers or purposely ignoring the FBAR deadline. Given how the tax evasion penalties are incredibly hefty, willful violators should brace for extreme fines. The government will have the right to seize 50 percent of the account or hundreds of thousands of dollars. Although the general consensus is that the IRS will go up to $100,000 in fines, this is not a rule. Many cases have seen the government charge up to $500,000 or even more. Think about the recent court case where the verdict found that a California taxpayer owes$1.5 million in FBAR fees.
The non-willful side of things is a bit better as the tax evasion penalties are nowhere near as high. A lot of expats simply get warnings from the IRS that allow them to correct the mistakes before the FBAR deadline. When it comes to monetary fees, most maximum amounts are either below or right around $10,000. Of course, the longer the period of non-reporting, the higher the costs. Hence why the FBAR deadline plays such a crucial role.
The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situations.
— Sami Ghaith
CPA, CGA, MBA