What is the FBAR, and why should you care about it?
The FBAR is an annual report that certain people are required to file when they hold financial assets in overseas bank accounts. The form itself is simple, but because it’s not filed with your annual tax return, it can be easy to forget.
We wanted to share with you some basic information about the FBAR and answer some of your most-asked questions so that you feel confident in your reporting responsibilities. Let’s start at the beginning.
What is the FBAR?
The FBAR — which stands for the Report of Foreign Bank and Financial Accounts — is an annual report filed by “US persons” who have financial interests in accounts located outside the US. The Treasury Department created the FBAR rules to help regulators and investigators track down illegal financial activity like money laundering and tax evasion.
The FBAR is administered by a division of the Treasury Department called the Financial Crimes Enforcement Network (FinCEN), but the IRS holds enforcement authority. This means that if you fail to file your FBAR, the IRS will be the one to issue an examination and enforce the FinCEN’s penalty programs.
Who Needs to File the FBAR?
FBAR reporting affects more people than you might think. It should already be on your radar if you are a US citizen who established an overseas bank account, but the FBAR may also be required for:
- US expats who live and work in another country
- A minor child who has foreign bank accounts
- US citizens who inherit foreign financial assets
- Individuals who invest in mutual funds that are held overseas
- A person or entity (like a trust) with a foreign cash-value life insurance policy
- A non-US citizen who established a foreign bank account before becoming a US resident
Entities like corporations, partnerships, LLCs, trusts, and estates may also be required to file a report if they have financial interests in overseas accounts.
To know for sure if you’re required to file a report, take a peek at the requirements below. You will only be subject to the FBAR filing requirements if all three of the following are true:
1. You are a US person.
A US person is defined as any of the following:
- A US citizen
- A US resident alien
- An entity organized in the US (corporation, partnership, LLC, trust, estate, etc.)
2. You have a financial interest in (or have signature authority over) financial accounts located overseas.
This includes bank accounts, checking accounts, brokerage accounts, options accounts, cash-value insurance policies, mutual funds, and nearly any other financial account maintained in a jurisdiction other than the United States or a US territory.
3. Your foreign financial assets exceed $10,000.
You will meet this threshold if the aggregate value of all your foreign accounts exceeds 10,000 USD at any time during the calendar year, even if just for one day.
If all three are true in a given calendar year, you are required to file the FBAR report, FinCEN Form 114. Each year, you will go through this determination process. It’s possible your filing requirements change from year to year. For example, if your account balances reach the $10,000 threshold this year but don’t quite cross that threshold next year, you would be required to file the FBAR for the 2022 report year but not for the 2023 report year.
We know that the FBAR can be a bit confusing, especially for recent US expatriates or for residents of other countries who just established residency in the US. Below we’ve answered the most commonly asked questions we get about the FBAR.
What’s in the FBAR Report?
Form 114 asks for the following information:
- Your identifying information and the identifying information of all joint account owners
- Account number and classification (e.g., checking, savings, brokerage account, etc.)
- The names and addresses of the foreign financial institutions that hold your accounts
- The maximum value each account reached during the tax year in US dollars
How do I determine the value of my account in US dollars?
You should use the Treasury Department’s exchange rate as of December 31st of your report year.
How do I file the FBAR?
You should file the FBAR electronically through the FinCEN’s BSA E-Filing System. If you want to paper-file your report, you’ll need to request an exemption from the e-filing requirement.
When is the FBAR due?
The FBAR is due on April 15th following the end of the report year. This due date applies to all individuals and entities across the board, which means that the due date may not line up with each taxpayer’s IRS income tax filing deadline.
Can I get a filing extension?
On behalf of FinCEN, the IRS grants an automatic 6-month filing extension, extending the deadline from April 15th to October 15th.
What happens if I file the FBAR late?
You may be subject to civil or criminal penalties for failing to file your FBAR or for filing it late. Most late filers will incur civil penalties of around $1,000, but when you show patterns of negligence or willfully ignore the filing requirements, you could be assessed criminal penalties of up to $500,000 and could be sentenced to up to 10 years in prison.
Fortunately, the IRS can help you come back into compliance. By following their Streamlined Filing Compliance Procedures (or by initiating a voluntary disclosure process), you should be able to get caught up on your filings without incurring any penalties.
What records should I keep and for how long?
If you file the FBAR, you’re required to maintain records of your overseas financial accounts for at least five years.
How is the FBAR different from IRS Form 8938?
IRS Form 8938 reports similar information to the FBAR, but Form 8938 is only required for taxpayers. FinCEN Form 114 must be filed by all US persons with overseas accounts exceeding $10,000, even those who aren’t required to file an annual income tax return.
How much does it cost to file the FBAR?
There is no filing fee associated with the FBAR.
Can I file the FBAR myself?
Because of the potential for misfiling penalties, we recommend you work with a CPA you trust to prepare your FBAR.
At AB FinWright, we know how overwhelming it can be to comply with filing requirements when you live in, travel to, or run a business in more than one country. We’d love to help. Our professionals have a wide range of experience on cross-border activity, and we can help make sense of these filing requirements for you. Reach out to us today and tell us a bit about your international activity, and together we’ll build a compliance plan that works for you.