Annual Foreign Bank Account Reporting

 In IRS Problems, Legal, Tax Filing

Each year I provide a tax organizer document for each of my tax preparation clients to complete. It requests demographic information and answers to several questions about the client’s tax situation. These questions ask about the client’s income and deductions and seek information to determine the client’s tax reporting obligations. One question that appears on each organizer is whether that individual or business has foreign bank accounts. While it may seem like an obscure question that is unlikely to generate a “yes” answer, because I have a diverse client base with various citizenship and residency backgrounds, I probably see “yes” answers to this question more often than many CPAs might. So, for those who are curious about reporting requirements for foreign bank accounts, this article is for you.

Why Does the U.S. Government Care About My Foreign Bank Accounts?

Most U.S. tax filers are required to report and pay taxes on their worldwide income. Though there are many valid reasons that certain individuals and businesses have foreign bank accounts, many taxpayers have used them for less than honest purposes. The IRS is very concerned about U.S. persons holding or moving funds offshore to evade U.S. income taxes. Foreign bank and brokerage accounts can generate taxable income such as interest, dividends, and capital gains. Additionally, foreign accounts are sometimes used to try to shield other types of income such as business profits, rental income, or royalties from U.S. taxation.

In 1970, the Bank Secrecy Act was passed and created the obligation of reporting foreign bank accounts on a form called the Foreign Bank Account Report (FBAR). The FBAR form is filed by U.S. citizens and resident aliens (non-U.S. citizens filing as tax residents of the U.S.) each year, around the same time as the tax return. The FBAR requires taxpayers to report amounts held in foreign bank accounts that exceed certain thresholds. Because the compliance with FBAR reporting wasn’t as great as the US government had hoped, in 2010 the Foreign Accounts Tax Compliance Act (FATCA) was passed to track down foreign accounts held by U.S. persons. FATCA requires foreign banks in 113 participating countries to report accounts held by U.S. persons to the U.S. government. So, with the banks reporting directly to the U.S. government, the IRS is more easily able to determine where U.S. taxpayers’ assets are held, even if they are not filing tax returns as required.

Who is Required to File the Foreign Bank Account Report (FBAR)?

U.S. persons with foreign bank or brokerage accounts that exceeded $10,000 on any date in 2021 are required to file the FBAR. However, there are certain exceptions to reporting, such as assets held in retirement accounts or military banks overseas. But most foreign accounts are required to be reported on the FBAR. No tax is due with the FBAR form itself, it is simply a means of meeting a compliance obligation. However, not filing the FBAR when required can result in a civil penalty of up to $100,000 or 50% of the balance in the unreported foreign account. Criminal penalties can result in up to 10 years in prison. However, the typical penalty is $10,000 or up to 5% of the account balance, whichever is greater.

In addition to filing the FBAR, it is also important that the taxpayer report any income associated with the foreign accounts listed on the form on his or her tax return. This includes interest, dividends, capital gains, or other portfolio income that results from that account as well as any rents, royalties, business income, or other taxable income received directly within the account from foreign or U.S. sources.

Who Is Required to File Form 8938, And Why Might I Have to File Two Forms?

The FBAR that I mentioned earlier is not filed with the IRS, it is filed with the Department of Treasury. However, oftentimes your tax preparer may still be able to prepare the FBAR for you and e-file it along with your tax return. I oftentimes do so on behalf of my clients at tax time if I am made aware of the reporting obligation through the client’s organizer responses. Some clients opt to self-prepare their FBARs. Important to note is that the obligation of filing the required forms belongs to the client, not the tax preparer. So if the client knows he or she has foreign bank accounts and does not see the required forms filed with the tax return in question, he or she should definitely speak up.

For taxpayers with foreign bank or brokerage accounts with balances that exceed even higher thresholds, the IRS wants to know about this on a form filed along with the tax return. This Form 8938 is filed in addition to the FBAR and is incorporated within the tax filing itself. The thresholds on Form 8938 vary depending on whether the holder of the foreign accounts is an individual or entity and the filing status of the individual return. To keep things simple, I will simply state that if your foreign bank or brokerage accounts had balances exceeding $50,000 on the last day of the year or $75,000 at any point during the year, you probably have a Form 8938 filing requirement.

The penalty for failing to file Form 8938 is steep as well. The base civil penalty is $10,000 and the maximum penalty is $60,000. Criminal penalties can apply as well for willful failures to file.

Important to note is that the FBAR requirements are different from the Form 8938 requirements, even though both of these forms are used to report foreign financial assets. The important thing is to let your tax preparer know if you have foreign bank or brokerage accounts (not held within an IRA or other retirement account) or are a signatory on the foreign bank account of another person or business, where the balance at any point in the year was $10,000 or more. You can do this by indicating it on your taxpayer organizer, and your preparer will request all the necessary information from there.

I hope you enjoyed reading about the foreign financial reporting requirements! If you have any questions about your reporting obligations for foreign financial assets, please contact me using the form below.

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