Requirements, Purpose and Definitions For Reporting Foreign Bank and Financial Accounts (FBAR)
The FBAR filing requirement is imposed upon taxpayers through the U.S. Treasury. Under Treasury regulations, any United States person who has a financial interest in a bank, security, or other financial account in a foreign country must make an FBAR filing annually, for any such account.
Accordingly, if you have a financial interest in or signature authority over a foreign financial account (this includes bank accounts, brokerage accounts, mutual funds, trusts, or other type of foreign financial accounts), the Bank Secrecy Act (https://en.wikipedia.org/wiki/Bank_Secrecy_Act) may require you to report the account every year to the Department of Treasury by electronically filing a Financial Crimes Enforcement Network (FinCEN) 114, Report of Foreign Bank and Financial Accounts (FBAR). (See http://www.fincen.gov/forms/bsa_forms/ )
Purpose of FBARs
The U.S. Treasury adopted the FBAR requirements, separate from the Internal Revenue Service, through the passage of a statute requiring U.S. residents or citizens “to keep records, file reports, or keep records and file reports” when the U.S. person “makes a transaction or maintains a relation for any person with a foreign financial agency.”
This type of information is particularly useful in criminal, tax, and regulatory investigations. Congress enacted the statute allowing the Treasury to establish FBAR rules because reports filed as a result of this regulation provide leads to investigators that facilitate the identification and tracking of illicit funds or unreported income, as well as providing additional prosecutorial tools to combat money laundering and other federal tax crimes.
In other words, the requirements exist to make it easier for the US government to find and prosecute those attempting to shield funds or assets in offshore havens.
Who is Required to File an FBAR Report?
For the purposes of the FBAR regulations, a “United States person” includes U.S. citizens, alien residents of the United States, and entities “created, organized, or formed under the laws of the United States.” The term “person” includes individuals and “all entities cognizable as legal personalities” and a “foreign country” may include “all geographical areas outside the United States.” LLCs are considered to be “U.S. persons,” as are trusts organized under the laws of a U.S. state or the District of Columbia.
The FBAR filing requirement applies to any U.S. person if the aggregate value of all of a person’s foreign accounts exceeds $10,000 at any point during the calendar year. The maximum value of each account or asset during the calendar year is the amount that will be used for reporting purposes. The reporting obligation is triggered even if none of the applicable accounts exceeds $10,000 during the calendar year. Any U.S. person who is required to file an FBAR as a holder of a foreign bank account must also report the existence of the account on his or her U.S. income tax return.
A “foreign financial agency” is defined as a person or entity “acting for a person as a financial institution, bailee, depository trustee or agent, or acting in a similar way.” This is not limited to simple cash accounts, but rather can include lines of credit, securities, gold, securities” or other commodities and assets. Exempt from this definition is “a country, a monetary or financial authority … or international financial institution of which the United States Government is a member.”
Further, under FBAR regulations any person with a “financial interest in” or “signatory authority” over a foreign account must comply with the reporting requirements of the statute (See 31 CFR § 103.24(a)). Essentially an individual has signatory authority if he or she can order distributions from the account. In contrast, if the individual merely has the ability to direct investments in the account, without the ability to effect distributions, they do not have “signatory authority” and does not fall within the scope of FBAR regulations.
The definition of “financial interest” is a bit trickier, and is defined by the FBAR statute in several ways:
- When the person is the owner of record or has legal title, whether the account is maintained for his own benefit or for the benefit of others (See 31 CFR § 1010.350(e)(1)). Thus, a U.S. person who has a foreign account must file FBAR, even if the account is maintained for the benefit of someone else. If the account is in the name of more than one person, all parties to the account are considered to have a “financial interest” and reporting obligations.
- A U.S. person who is appointed to the account of another person as “an agent, nominee, attorney or in some other capacity on behalf of” the U.S. person also has a financial interest in that account.
- A corporation in which the U.S. person owns more than 50 percent of the company’s stock;
- A partnership in which the U.S. person receives profits or capital exceeding 50 percent;
- A trust in which the U.S. person is an owner of any part of the trust, “has a present beneficial interest in more than 50 percent of the assets,” or “receives more than 50 percent of the current income;”
- An entity in which the U.S. person “owns directly or indirectly more than 50 percent of the voting power, total value of the equity interest or assets, or interest in profits,” other than a corporation, partnership, or trust (See 31 CFR § 1010.350(e)(2)).
Finally, the FBAR regulations also require a U.S. person to report on any entity that was created for FBAR avoidance purposes. According to the statute, a U.S. person that “causes an entity…to be created for a purpose of evading” FBAR reporting is considered to have a financial interest in any account “for which the entity is the owner of record or holder of legal title” (See 31 CFR § 1010.350(e)(3)). These anti-avoidance rules do not apply to U.S. persons who make a good faith effort to comply with FBAR but fail to do so.
Which Foreign Financial Accounts are Subject to the FBAR Requirement?
An account is considered “foreign” for the purposes of FBAR filing if it has a geographical location outside of the United States. This may seem like a simple definition, but practical application can be more tricky than expected. For example, a foreign branch of a U.S. institution may be reportable, whereas a U.S. branch of a foreign bank will not be reportable.
FBAR reporting requirements apply to any “bank, securities or other financial accounts.” The term “bank account” encompasses “a savings deposit, demand deposit, checking, or any other account maintained with a person engaged in the business of banking,” including certificates of deposit which allow individuals to deposit funds with the banking institution and later redeem the initial amount. The term “securities account” refers to “an account with a person engaged in the business of buying, selling, holding or trading stock or other securities.”
“Other financial accounts” are defined in the regulation as including the following:
- An “account with a person that is in the business of accepting deposits as a financial agency,”
- An insurance policy or annuity with a cash value,
- An “account with a person that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association,”
- An account with a “mutual fund or similar pooled fund which issues shares available to the general public that have a regular net asset value determination and regular redemptions.”
How a Tax Attorney Can Help with FBAR Reporting
Individuals with foreign assets and bank accounts have been under increased scrutiny in recent years. In addition to reporting foreign income, taxpayers must take the important step of filing an FBAR form in order to avoid penalties and fines.
The Tax Lawyer
- William D. Hartsock has been successfully helping clients with tax issues related to their foreign assets since the early 1980s. Mr. Hartsock offers free consultations with the full benefit and protections of attorney client privilege to help people clearly understand their situation and options based on the circumstances of their case. To schedule your free consultation simply fill out the contact form found on this page, or call (858) 481-4844.