If you have checking, demand deposit, or investment accounts based with an offshore financial institution, there’s a good chance that you will need to file what’s known as a Foreign Bank Account Report. Popularly referred to as an FBAR, this report is typically filed once a year. There are exceptions based on the amount of funds you have in those offshore accounts.
How do you know when it’s necessary to file an FBAR? If you do need to file the report, how do you go about doing so? Here are some essentials that will help you understand the nature of the filing, what it means for your financial well-being, the potential penalties for failing to file, and how you go about filing the right report by the right due date.
Understanding the Basics
Updated in 2013 to what is known as Form 114, the Foreign Bank Account Report is a document that is filed with the US Financial Crimes Enforcement Network (FinCEN). FinCEN is a bureau that is part of the US Treasury Department. Don’t allow the name of the bureau to intimidate you. Your filing is not in any way an inference that you might be involved in some sort of illegal activity. The goal is simply to ensure that there are no questionable issues occurring with your domestic or international holdings.
Remember that you do not file your FBAR with the IRS. It’s not directly connected to your taxes. There are other forms that you would file along with your income tax returns that are related to your foreign holdings. Specifically, you may need to file the FATCA-related Form 8938 with your returns. Form 8938 would be sent to the IRS and not to the Financial Crimes Enforcement Network. Your accountant can help you track when you need to file each of these forms and which agency, or bureau needs to receive them.
Who Has to File an FBAR?
Citizens or resident aliens of the United States who have any type of financial interest in or who have signature authority over one or more offshore accounts may need to file an FBAR. There are specific requirements that determine if there’s the need to file this report in any given calendar year.
One important requirement is that the report must be filed if the cumulative balance in all of the filer’s offshore accounts exceeds a certain amount at any time during the year under consideration. Since that amount may be subject to change, it’s important to seek help from a CPA who can verify what the current minimum amount happens to be.
Is There a Threshold for Filing an FBAR?
As of 2019, there is a threshold or minimum balance that would require you to file an FBAR. At present, the cumulative balances of your offshore accounts would have to meet or exceed the amount of $10,000 USD in order to require the filing. That balance could be realized at any time during the year under consideration and would include balances in investment accounts, demand deposits, any form of savings account, or a checking account.
The key here is that you have to be aware of your account balances throughout the calendar year. Even if those combined balances are less than $10,000 USD at the end of the year, you may still need to file the report. For example, the total in those accounts reached a peak amount of $12,000 during the third quarter. Even though they dropped back down by the end of the fourth quarter, you will still need to file an FBAR.
Will I Pay Taxes Based on the FBAR?
The purpose of the FBAR is to account for funds that US citizens or resident aliens have placed in offshore accounts. However, they have nothing to do with the amount of taxes that you owe. Your tax burden is based on the amount of income that’s generated from domestic sources and other sources that current tax laws do consider subject to taxation. As of the end of 2019, the holdings in your offshore banking and investment accounts are not factored into your tax burden.
Don’t forget that the FBAR is not a form that you include with your tax returns. It goes to a separate bureau within the Treasury Department. The goal of having citizens and resident aliens file the report is to minimize the amount of fraud that sometimes takes place when unscrupulous individuals and businesses seek to hide funds from the government. Since you have no intention of doing so, there is no need to worry about your FBAR filing having any impact on your taxes.
What Happens If I Fail to File the FBAR?
Keeping track of the balances in your offshore accounts is important for more than one reason. When it comes to reporting your wealth to a domestic agency, you want to avoid any penalties that could result from failing to file your FBAR. That includes the rather stiff financial penalties that could come about if you overlook filing one year.
There are two possible penalties that may apply. Each depends on the reason for failing to file. For example, you may be charged a penalty because the failure to file is considered non-willful. This simply means that you made an honest mistake and did not realize that your offshore assets exceeded the $10,000 USD threshold. In this scenario, you would be assessed a penalty of $10,000 per violation.
The second penalty has to do with a charge of willful failure to file. In this instance, there is evidence that you intentionally chose to not file in an attempt to hide funds. The financial penalty would be either $100,000 USD or half of the balances in your offshore accounts, whichever is higher. There is also the possibility of further penalties, up to and including jail time.
Being assessed a civil penalty does not automatically preclude the possibility of being charged with a criminal offense. A lot depends on the circumstances surrounding the failure to file. The IRS could issue a warning in lieu of taking additional actions. At the same time, criminal actions are likely to result in more fines and up to five years in prison.
What’s the Actual Filing Process Like?
At present, you can obtain Form 114 online through what is known as the BSA E-Filing System website. The form itself comes with a series of instructions similar to the way the Treasury Department provides instructions for filling out tax forms. The instructions are set up so that you can go over the form line by line and determine what information needs to be included in each field.
The current structure requires that the report be submitted electronically by June 15. In years past, the final date was June 30. Unlike filing tax forms, there are no extensions and no grace periods. You can complete the report and then follow the instructions provided to submit the finished report. The system is set up to provide an acknowledgement that the document was received.
If you are an individual or filing the report with a spouse, you do not need to set up an e-filing account. Accountants, legal counsel, or an agent who files the reports on behalf of clients will need to establish an account.
Keeping Your Financial Reporting in Order
The bottom line is that you should file an FBAR every year if you meet the threshold. In order to confirm that you do need to file, it’s important to stay on top of the current balances in your offshore accounts.
Our team at Caye International Bank is dedicated to helping clients keep their financial affairs in order. We can help you with necessary documents or other details that will make filing your FBAR simpler and faster.
Contact us today to discuss your offshore banking needs.