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IRS Issues Guidance on FBAR Definitions and Reporting Requirements

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IRS Issues Guidance on FBAR Definitions and Reporting Requirements

A Report of Foreign Bank and Financial Accounts (FBAR) is a yearly report submitted to the Financial Crimes Enforcement Network (FinCEN), according to current IRS guidance. The filing requirements often fall on United States persons (USPs) with foreign financial accounts held overseas.

FBAR filing is required for certain USPs with over $10,000 across all qualified foreign financial accounts. Eligible USPs include domestic citizens, resident aliens, expatriates, and certain domestic entities. According to IRS guidance, the term foreign financial accounts refers to but is not limited to: bank accounts, securities accounts, commodity features, and options accounts held overseas. Individuals with a direct or indirect interest in foreign financial accounts may also be subject to FBAR filing. The deadline to file an FBAR is April 15th, and penalties will be imposed for non-compliance.

Understanding your FBAR reporting liability is crucial, especially if you hold financial accounts overseas. For assistance and guidance on FBAR filing, USPs can call the Dual Licensed International Tax Attorneys and CPAs at the Tax Law Offices of David W. Klasing today at (800) 681-1295.

Understanding FBAR and Reporting Requirements

An FBAR, or a Foreign Bank and Financial Accounts Report, is an annual report of a U.S. person’s or entity’s overseas financial holdings. This report aims to inform the Financial Crimes Enforcement Network and, by extension, the IRS of American funds overseas, to prevent financial crimes like money laundering and tax evasion. Often, American expatriates, citizens with overseas financial interests, and domestic corporations engaging in business overseas are subject to FBAR filing. As the IRS updates FBAR filing requirements, those subject to reporting should remain informed.

Persons and Entities Required to File an FBAR

According to IRS guidance, all U.S. persons, including citizens, green card holders, and domestic corporations, partnerships, trusts with certain financial holdings or assets overseas must file an FBAR annually. For the remainder of 2022 and 2023, the threshold for filing an FBAR is holding the equivalent of $10,000 in certain foreign financial accounts at any time during the calendar year. This amount refers to the aggregate funds USPs have within all qualified financial accounts they might hold overseas.

Definitions of Financial Accounts for FBAR Purposes

Only certain financial accounts are subject to FBAR filing for certain USPs. Understanding the IRS’s guidance on this subject is crucial, as some financial accounts might be more obscure than others. Currently, the IRS mandates that the following accounts be reported in an FBAR annually if their aggregate funds exceed $10,000 at any point during the calendar year:

  • Foreign bank accounts
  • Foreign securities accounts
  • Foreign commodity futures
  • Foreign options accounts
  • Foreign insurance policies with a cash value
  • Foreign annuity policies with a cash value
  • Foreign mutual funds accounts
  • According to the IRS, some foreign financial accounts or holdings are excluded from FBAR filing requirements. The following financial accounts or holdings held by USPs are not reportable on an FBAR:

  • Foreign stocks held directly by a USP
  • Foreign bonds held directly by a USP
  • Foreign real estate
  • Foreign accounts holding sole real estate
  • Precious metals, stones, and other jewels held directly by a USP abroad
  • Foreign safety deposits
  • Definitions of Financial Accounts in Foreign Countries for FBAR Purposes

    What constitutes a financial account as foreign, and thus potentially subject to FBAR filing requirements according to the IRS, is its location. According to current IRS guidance, any previously mentioned financial account held outside the U.S. or a U.S. territory is considered a foreign financial account. Simply holding a foreign financial account may not make USPs required to file an FBAR annually, as the aggregate amount held within all accounts is what matters. If the aggregate amount is equivalent to upwards of $10,000, a USP must file an FBAR.

    Definitions of Financial Interests, Signature, or Other Authorities for FBAR Purposes

    The IRS mandates that USPs with certain direct or indirect foreign financial interests, or those with a signature authority or other authority over a foreign account, might have an FBAR reporting liability. For example, a USP with a foreign account that has partial ownership of a corporation, partnership, or trust, may be required to file an FBAR annually.

    Having a signature authority or other authority over a foreign financial account refers to USPs that have influence or control over the disposition of money, funds, or other assets held within a foreign account, despite that account being owned by another person or entity. USPs for whom this definition applies may have an FBAR filing liability.

    Computing Funds Held in Foreign Accounts for FBAR Purposes

    The IRS provides strict instructions for USPs to calculate funds held across foreign accounts and to understand their FBAR reporting liability. The first step in this process is identifying each foreign account are subject to FBAR reporting and to assess the funds within those accounts.

    Next, a USP must convert the maximum value of each applicable foreign financial account to U.S. dollars. To do this, USPs must use the current, official exchange rate set by the Treasury Reporting Rates of Exchange.

    Finally, a USP must compile the properly converted funds held across all foreign financial accounts to determine the aggregate value held overseas. If that amount exceeds $10,000, a USP must file an FBAR.

    Filing an FBAR and Penalties for Non-Compliance

    Though the IRS issues guidance on FBAR reporting requirements, it is not with the IRS that USPs file an FBAR. Instead, an FBAR must be filed with the Financial Crimes Enforcement Network through the agency’s BSA E-Filing system.

    The due date to file an FBAR is Tax Day, which is generally April 15. The IRS reminds FBAR filers that an FBAR must be submitted to FinCEN specifically and cannot be submitted alongside a USP’s annual tax return. FinCEN allows for an automatic six-month extension for FBAR filers that fail to submit a report by the deadline. After this point, financial penalties might be imposed for non-compliance. Similar penalties might be imposed for inaccuracies in an FBAR. The IRS can penalize USPs for improper FBAR filing for up to six years.

    Call Our Dual Licensed Tax Attorneys and CPAs Today

    If you need assistance filing an FBAR or need help getting back into compliance over undeclared foreign accounts and unreported taxable offshore income, our international tax lawyers & CPAs can help. To learn more about how the Dual Licensed International Tax Attorneys and CPAs at the Tax Law Offices of David W. Klasing can assist you, call us at (800) 681-1295. If you find yourself under audit and have undisclosed foreign accounts and unreported offshore income, you will definitely need our services…

    See our 2011 OVDI Q and A Library

    See our FBAR Compliance and Disclosure Q and A Library

    See our Foreign Audit Q and A Library

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