Managing taxes in the US is tricky enough, but once you have money overseas, it gets even more complicated. If you have bank, investment, or other financial accounts abroad, you may need to report them through a form called the FBAR. Failing to follow the rules can have a significant impact on your finances, so it’s essential to understand the rules and regulations, not just to stay on the right side of the law, but also to protect your assets.
At Eric M Hunt, CPA, we believe that understanding the details is the key to staying compliant. In this guide, we will walk you through the key parts of FBAR, so you’ll know exactly if you need to file and how to do it right.
What is an FBAR? Understanding the Basics
An FBAR (which stands for Report of Foreign Bank and Financial Accounts) isn’t the same as a tax return. It’s an informational report you file online with the Financial Crimes Enforcement Network (FinCEN). This is part of the US Department of the Treasury.
The goal is straightforward but essential: to help stop tax evasion and illegal money activities by shedding light on foreign accounts owned by US citizens. It’s important to know that the FBAR is a separate form from your tax return, even though they’re closely connected.
Who Must File an FBAR? The Key Tests
There are three main factors to consider when determining whether filing an FBAR is necessary. You must file if you are a “US Person” who had a “financial interest” or “signature authority” in any “foreign financial account” where the aggregate maximum value of all those foreign accounts exceeded $10,000 during the previous year.
- The “US Person” Test: This applies to U.S. citizens, resident aliens (green card holders), and businesses or entities established under U.S. law, including corporations, partnerships, LLCs, trusts, and estates.
- The “Financial Interest” or “Signature Authority” Test: You don’t need to be the only owner. If you can access or control the account through the bank, even if you don’t own it, you may still need to file because of signature authority.
- The $10,000 Threshold: This is the key factor that really matters. That $10,000 is not an average; if your combined foreign account balance exceeds $10,000 at any point during the year, you will need to file an FBAR.
What Accounts Need to Be Reported? A Comprehensive List
The term’ foreign financial account’ covers a lot, and in most cases, if the account is outside the United States, you’ll probably need to report it. That could include:
- Bank Accounts: Savings, checking, and time deposit accounts.
- Securities and Brokerage Accounts: Accounts used to hold things such as stocks, bonds, mutual funds, and similar investments.
- Retirement Accounts are maintained overseas.
- Accounts at foreign branches of US banks are a point that often trips people up.
- Certain types of life insurance policies or annuities accumulate cash value.
How to File an FBAR: A Step-by-Step Guide
Thankfully, the process isn’t too complicated, but it does require careful attention to the details.
- Step 1: Gather Your Information. You will need a few key details: the name on the account, the number, the address of the foreign bank or institution, and the highest balance the account reached during the year.
- Step 2: Use the FinCEN E-Filing System. The FBAR is not something you submit with your tax return. You will have to file it electronically using the secure FinCEN BSA E-Filing System at www.fincen.gov. Paper forms are not accepted anymore.
- Step 3: Know the Deadlines. The deadline to file is April 15, but don’t worry – there’s an automatic extension until October 15 if you need more time. You do not need to take any action to receive the extension. It’s given to everyone by default.
Common FBAR Mistakes to Avoid
Even if you are doing your best to stay compliant, it’s easy to make a few missteps. These are some of the most common ones we come across at Eric M Hunt, CPA:
- Misunderstanding the Aggregate Balance: Keep in mind, it’s the total across all your foreign accounts that you need to consider. If one account has $6,000 and another has $5,000, you still have to file, even though neither account hits $10,000 alone.
- Forgetting About Signature Authority: Many individuals are unaware that accounts they manage for work or family members must be reported to the relevant authorities. If you have signature authority, there’s a good chance you need to file.
- Missing the Deadline: If you miss the deadline without willful intent, you could face fines starting at $10,000 per offence. Willful offenses can result in significantly steeper fines and possibly lead to criminal charges.
FBAR vs FATCA: What’s the Difference?
Many taxpayers confuse FBAR with FATCA (Foreign Account Tax Compliance Act). They sound similar and deal with foreign accounts, but they serve different purposes.
- FBAR: If your combined foreign account balances go over $10,000, you must file with FinCEN on FinCEN Form 114.
- FATCA: This is accomplished by completing Form 8938 and submitting it with your annual tax return. Thresholds for Form 8938 are generally higher, usually between $50,000 and $200,000, depending on factors like your filing status and location. Plus, the way these thresholds are determined isn’t quite the same as for other reports.
You may need to file both forms, only one, or not file at all – it all depends on your specific circumstances. A tax advisor can help make sense of it.
FAQs: Your FBAR Questions Answered
1. Do I need to file an FBAR if my account is under $10,000?
Only if the combined total of all your foreign financial accounts exceeded $10,000 at any point in the year, if the total never reached $10,000, you do not need to file.
2. What are the penalties for not filing an FBAR?
Penalties can be severe. For non-willful violations, the penalty can be up to $10,000 per violation. For willful violations, penalties can be the greater of $100,000 or 50% of the account balance at the time of the breach, per violation.
3. Where can I get help with my FBAR filing?
The IRS and FinCEN websites offer resources. However, for personalized guidance, especially if you have multiple accounts or complex financial situations, consulting with a qualified CPA firm, such as Eric M Hunt, is the most reliable path to ensure accuracy and peace of mind.
Essential Resources and Contact Information
- IRS FBAR Information Page: www.irs.gov/fbar
- FinCEN’s BSA E-Filing Website: www.fincen.gov/bsa-filing
- IRS FBAR Hotline: 866-270-0733
- FinCEN Regulatory Support Section: 800-949-2732
Conclusion: Don’t Gamble with Compliance
It may feel like a lot, but there’s a purpose behind these strict rules. Filing might feel like a hassle at first, but the consequences of skipping it can be a lot worse. The best way to avoid trouble is to stay on top of your compliance.
If you are unsure about your filing requirements or need expert assistance in preparing and submitting your FBAR, the team at Eric M Hunt, CPA, is here to help. We are here to help you make sense of the complex world of international tax reporting and make sure you stay on top of your deadlines.
Why leave your finances up to chance? Let’s talk – schedule your consultation today.
