FBAR
What is FBAR?
If a taxpayer has a financial interest in, or signature authority over any foreign financial account, such as a bank account, brokerage account, mutual or trust fund that of which exceeds particular thresholds, then the Bank of Secrecy Act may require the taxpayer to report the account’s annual report to the Department of Treasury. The process occurs through an electronic filing of the Financial Crimes Enforcement Network (FinCEN) 114, named Report of Foreign Bank and Financial Accounts (FBAR). In other words, the IRS requires citizens and residents to fill out a form, known as an FBAR form, that reports the accounts they have in other foreign countries.
FBAR Form
The FBAR FinCEN Form 114 or Report of Foreign Bank and Financial Accounts matters for those who are U.S citizens or residents that have financial accounts; or authority over financial accounts including outside of the United States. This form also applies to foreign banks that are headquartered in the United States.
Who Needs to File an FBAR Form and FBAR Filing Date
All those who attain U.S. citizenship and/or residency, that has a foreign financial bank account headquartered outside of the United States of America; securities or brokerage accounts; or mutual funds or other accounts; located abroad, must file an FBAR form. It is imperative to add that if the foreign funds exceed $50,000, then the taxpayer must file and report Form 8938, in addition to the FBAR form. If the taxpayer follows through with the criteria for FBAR, then all foreign financial account information and foreign financial assets of the foreign account must be filed electronically by the calendar year due date. The filing deadline is April 15. The process is through the BSA e-filing system. You only need to file if you have these accounts in another country and the funds in these accounts exceed $10,000. If funds exceed $10,000 at any time, then you are required to file the form and report it as such.
If you are unsure whether you need to file or not, answer the following:
- You are a U.S. citizen, resident, or corporation with signature authority over financial interest in at least one financial account outside of the country.
- You had foreign financial accounts with an aggregate value of over $10,000 during the year.
Penalties For Not Filing
Like with any tax or funds that you fail to report, there are consequences issued by the IRS that range in severity. If the file isn’t willful, then the penalty can reach up to $10,000 unless the failure to report was due to reasonable cause. If the failure to report is willful, then the penalty can be astronomical and reach upwards of $100,000 or 50% of the total amount in the accounts. The IRS will choose based on whichever amount is greater. In the most severe cases, criminal penalties may also be at stake.
What Is Offshore Tax Compliance?
Offshore tax compliance is the actual procedure of reporting all income, assets, and accounts that a U.S citizen or resident maintains in a foreign country, or a foreign bank that is headquartered in the U.S. When filing taxes, the taxpayer must provide a report, either on an FBAR form, or another form that reports the highest amount of the year or the balance at the end of the year, to the IRS.
Offshore Voluntary Disclosure Program
According to the IRS, the Offshore Voluntary Disclosure Program (OVDP) is a voluntary disclosure program that is specifically designed for individuals exposed to criminal liability and/or substantial civil penalties due to a willful failure to report foreign assets and pay all tax due in respect to those assets. The program is designed to protect taxpayers from criminal liability and establish terms for resolving their civil tax and penalty obligations. To learn more or to ask further questions regarding how to qualify for the Offshore Voluntary Disclosure Program, contact us at Victory Tax Lawyers.
Reporting Nuances for Jointly Owned Accounts
Understanding how to navigate through the meanders of reporting jointly owned accounts on the FBAR can safeguard against inadvertent non-compliance.
Individual Reporting Obligation
Each co-owner, if qualifying as a U.S. person, has an obligation to report the account on their individual FBAR. The entirety of the account’s maximum value must be reported on each co-owner’s FBAR, even though this might intuitively seem like a duplication.
Distinguishing Between Co-Owners and Signatories
Significant to note is the differentiation between being a co-owner and having signatory authority over an account, as both circumstances entail FBAR reporting but are entwined with different implications.
Co-Owners
- Report the entire account value.
- Are accountable for ensuring the accuracy of the reported details.
Signatories without Ownership
- Reporting the account remains necessary, though it may not incur tax liabilities.
- Filing the FBAR to disclose financial interests or authority in a foreign account is essential.
Penalties for Non-Compliance
Adhering to FBAR mandates is crucial, considering the stringent penalties associated with non-compliance or erroneous reporting.
Monetary and Non-Monetary Consequences
Severe financial penalties can be imposed, which can be punitive, especially when non-willful neglect is determined.
Willful violations can introduce even more austere repercussions, both financially and potentially criminally.
Cryptocurrencies in the Context of FBAR
Cryptocurrencies, epitomized by Bitcoin, Ethereum, and a proliferating list of digital assets, dwell in a space where technology and finance converge.
Defining Cryptocurrencies
- Decentralized Nature: Operating without a central authority, such as a bank.
- Blockchain Technology: Utilizing a decentralized ledger to record transactions.
The FBAR Requirement
- Purpose: To report a financial interest in or signatory authority over foreign financial accounts.
- Threshold: Aggregate value exceeding $10,000 at any time during the calendar year.
The Landscape of Cryptocurrency Storage
Cryptocurrency can be stored in various digital wallets, each presenting distinctive considerations from an FBAR reporting perspective.
- Wallet Types
- Hot Wallets: Internet-connected wallets, often hosted by exchanges.
- Cold Wallets: Offline storage, like hardware or paper wallets.
Distinguishing Reportable and Non-Reportable
- Exchange Wallets: Often subject to FBAR when hosted outside the U.S.
- Personal Wallets: Typically, non-custodial wallets may not be reportable, but this terrain remains grey and subject to regulatory evolution.
FBAR Reporting for Retirement Accounts
Before we delve into record retention and penalties, let’s briefly recap FBAR reporting for retirement accounts:
- FBAR Requirement: U.S. persons with foreign financial accounts totaling more than $10,000 at any point during the calendar year are required to report these accounts on an FBAR.
- Retirement Accounts: Retirement accounts, such as 401(k)s, IRAs, or foreign pensions, are considered foreign financial accounts and may need to be reported on the FBAR.
Record Retention
Record retention is a fundamental aspect of financial compliance. Knowing how long to keep FBAR-related records is essential to ensure you can provide necessary documentation if the IRS conducts an audit or if questions arise regarding your FBAR filing.
The General Rule
A prudent approach is to retain FBAR records and related documents for a minimum of five to seven years after the filing deadline of the FBAR.
The Reasoning
FBAR Statute of Limitations: The IRS has a statute of limitations, which generally allows them three years from the date of FBAR filing to assess additional taxes and penalties, or initiate an audit. Keeping records for a longer duration provides an extra layer of protection.
Amended FBARs: If you file an amended FBAR, which is permissible, the statute of limitations resets. Hence, retaining records for several years is a wise choice.
Specific Record Types
To determine what records to retain, consider the following:
- Copies of Filed FBARs: Keep copies of each FBAR you’ve filed. These should include details about your foreign retirement accounts and the maximum values reported.
- Supporting Documentation: Retain supporting documents, such as account statements, transaction records, and correspondence with financial institutions, that demonstrate the values and transactions in your foreign retirement accounts.
- Proof of Reporting Method: If you use tax preparation software or engage a tax professional to file your FBAR, retain records that confirm your reporting method.
Electronic Storage
In the digital era, utilizing electronic storage for records has become prevalent. Guarantee that digital copies of documents are comprehensive, readable, and readily accessible. Additionally, it is prudent to create backups of electronic records to safeguard against potential data loss.
Trusts and FBAR
Trusts, which serve as entities that manage assets for the benefit of particular individuals or entities, demand a specialized perspective when interpreting FBAR requirements. Trustees, at the helm of these trusts, are commonly bound by fiduciary duties, ensuring the protection and proper management of these assets. As a result, it becomes essential to distinguish whether the FBAR obligations lie with itself, the trustee, or the beneficiaries. Furthermore, some trusts mandate their beneficiaries to disclose foreign financial assets. Delving deeper, it’s crucial to recognize the distinctions between discretionary and non-discretionary beneficiaries, as these subtleties can significantly influence one’s FBAR reporting obligations.
FBAR and Business Entities
Navigating through the labyrinth of guidelines and considerations pertaining to the FBAR (Foreign Bank and Financial Accounts Report) filing, business entities such as corporations, partnerships, and LLCs find themselves ensnared in a distinct set of compliance obligations at the entity level. This often hinges on the specifics of foreign account ownership and involves a thorough understanding of the roles of officers or members who possess signature authority over those accounts. Simultaneously, individuals within these entities might be encumbered with separate FBAR obligations, necessitating a careful differentiation between entity and individual responsibilities in this context. This pivotal distinction underscores the imperative of discerning clarity in compliance practices, ensuring that both the entity and its members adequately address their respective reporting obligations, safeguarding against inadvertent non-compliance
Changes To OVDP
In 2018, the IRS brought sweeping changes to the OVDP as outlined below. The OVDP, or foreign income, and domestic income are now combined and follow similar rules. There is a new “preclearance letter” in progress by the IRS and it is unclear whether it will be mandatory or voluntary. The time period for processing the disclosure will be shortened from 8 years to 6. The annual penalty will increase from 20% on the amount due to 75%. These are only some of the changes to come. To get a more complete list, please contact us with your questions. We at Victory Tax Lawyers would be happy to assist you.
There were many benefits to participating in the OVDP. Namely, you normally get to bypass any criminal investigation and the civil penalties are fixed at 27.5%. This may seem high, but the alternative if they catch you can be north of 50%. However, there is a streamlined program that has a reduced penalty of 5%. Whether you qualify for this depends on your specific circumstances.
As of September 28, 2018, the IRS has terminated the Offshore Voluntary Disclosure Program (OVDP). While the Streamlined Filing Compliance Center remains available, rumors continue to circulate that the IRS may be ending it as well. Don’t allow this opportunity to pass you up. Let us help you get back into compliance with little to no exposure to federal tax. Contact Victory Tax Lawyers today for a free consultation with one of our experienced tax attorneys at 866.640.0640.