FBAR Reference Guide (IRS Publication 5569)
When it comes to international reporting for foreign bank and financial accounts, oftentimes it can get unnecessarily confusing due to all of the ambiguous information available on the World Wide Web. One aspect of reporting the FBAR that makes it confusing is that it involves two separate Government agencies. On the one hand, the FBAR form is technically a FinCEN (Financial Crimes Enforcement Network) Form (aka FinCEN Form 114) – and since 2013, FBARs are reported directly to FinCEN on the FinCEN website. On the other hand, since 2003 the Internal Revenue Service has been tasked with enforcement of compliance. Recently, in March 2022, the IRS issued Publication 5569 regarding the reporting of foreign bank and financial accounts (FBAR) Reference Guide. Let’s go through 10 important aspects of the new FBAR reference guide for US persons with foreign account reporting requirements.
Who Is a US Person for FBAR Purposes?
A US person is more than just an individual. Rather, a “US person” refers to a citizen or resident of the United States, as well as certain entities that were created under US law. Some examples include a corporation, partnership, trust, limited liability company, and even an estate.
What Is a Financial Account?
A financial account is more than just a bank account. Rather, a foreign financial account can include several different items that are reportable, such as checking and savings accounts; securities accounts; commodity futures or options accounts; insurance policies; mutual or other pooled funds; and more.
While (at the time of this article) cryptocurrency is not required to be reported unless the account holds other types of currencies in addition to cryptocurrency, Notice 2020–2 shows that the US government has every intention of requiring virtual currency as a reportable account under 31 CFR 1010.350.
Determining Maximum Account Value for FBAR
The reporting requirement is that those who have to file an FBAR must report the maximum account value throughout the year. Generally, this is done by translating or exchanging the foreign money into US dollars using the exchange rate on the last day of the year – noting that the IRS recommends using the Treasury Department exchange rates, which can be found here.
What Is a Financial Interest?
There are two main categories for reporting foreign accounts on the FBAR: (1) accounts in which a person has a financial interest and (2) accounts in which a person has no financial interest but rather has a form of signature authority. The publication sets forth various examples of when a person is considered to have a financial interest and it is clear from the examples that there are many situations that would require a person to report the account. For example, if an account is for a Domestic Corporation, the reporting can get more complicated. Those with US entities should consider the different reporting requirements and what the IRS deems a financial interest.
Understanding Jointly Held Account FBAR Reporting
One common misunderstanding is when people report joint accounts, they only report their interest in the joint account. For example, if a person is a third owner of an account with $150,000 in it, they only report $50,000, but that is incorrect. IRS Publication 5569 makes it clear that if a person has an interest in a joint account, then the entire value of the account (and not just the portion of the account they own) is reportable.
FBAR Exceptions to Filing
There are some exceptions to having to file the FBAR, but they are far and few between, and more often than not, a person will have to file an FBAR. One common exception is when a person owns a US retirement account in which the retirement account may have some foreign holdings that would otherwise qualify for FBAR reporting. Since they are held within a US IRA or tax-qualified retirement plan (and not individually), reporting may be avoided in these situations.
Due Date for FBAR Filing
The FBAR is technically due in April when taxes are due. Previously, the form was due on June 30. While April is the due date for filing the FBAR, the form is currently on automatic extension and has been for the past few years. By being an automatic extension, that means that the taxpayer has until October without having to file any additional extension form such as Forms 4868 or 7004.
FBAR Penalties Explained
The main reason why this one particular form, which is not even a tax form per se, is causing so many issues — is due to the penalties. The IRS and courts across the nation disagree on how certain penalties should be issued; the definition of “FBAR violation“; and especially, what is the extent of the non-willful penalty: is it per account per year or per form per year. The publication set out some of the basics about the penalties, and taxpayers should be aware that the IRS is actively enforcing penalties – which can be harsh. With that said, the IRS also offers several amnesty programs to assist taxpayers with getting into compliance, and in some scenarios, a taxpayer may still be able to avoid penalties altogether.
Other Foreign Account Reporting Forms to File
While the FBAR is the most common of the international reporting forms (due to the fact that it encompasses many different types of categories of accounts), it is just one of several international reporting forms that may be required. Oftentimes, taxpayers will have to file several forms in order to comply with the requirements for foreign financial accounts and other assets, such as FATCA Form 8938; Foreign Gifts and Trusts (Form 3520/3520-A); and Passive Foreign Investment Companies (Form 8621).