Annual Filing of Foreign Bank Account Reports for U.S. Taxpayers

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By Hank Bourg

Jul. 8 – U.S. taxpayers holding financial interest or other authority over a financial account in a foreign country amounting to more than US$10,000 are required to file the annual Foreign Bank Account Report (FBAR) by June 30th of the following year.

The FBAR is not a tax return, but a report filed with the Treasury Secretary indicating the taxpayer’s interest in a foreign account.

In 2008, FBAR rules were expanded to apply the filing requirements to persons in and doing business in the United States. This potentially includes non-resident foreigners working in the United States and has signing or other authority over foreign financial accounts.

A financial interest is described as the following:

  • An account when the person is the owner of record or has legal title
  • An account when the owner of record or holder of legal title is a person acting as an agent, nominee, attorney or in some other capacity on behalf of a U.S. person
  • A corporation in which the U.S. person owns directly or indirectly more than 50 percent of the vote or value of all shares of stock
  • A partnership in which the U.S. person owns an interest in more than 50 percent of the profits or capital of the partnership
  • A trust in which the U.S. person either has a beneficial interest (directly or indirectly) in more than 50 percent of assets or receives more than 50 percent of current income
  • An account when the owner of record or holder is a trust for which a trust protector has been appointed

However, due to concerns and questions raised about the expanded definition, for this year only the IRS allowed taxpayers and others to rely on the definition of a United States person included in the prior instruction: “The term “United States person” means (1) a citizen or resident of the United States, (2) a domestic partnership, (3) a domestic corporation, or (4) a domestic estate or trust.”

This only applies to definition of who must file, all other requirements of the current version of the FBAR form and instructions remain in effect.

Any of the following types of account are covered by the filing requirements: bank accounts, security accounts (brokerage) including derivatives, mutual funds, and certain types of Annuities or pension accounts.

Recently, the IRS announced that it would enforce penalties for noncompliance of the FBAR going back as far as six years which is the statute of limitations under the Bank Secrecy Act.

The penalties can be quite severe. The maximum annual penalties for failure to file will be US$10,000 for non-willful noncompliance, US$100,000 or 50 percent of the amount of the underlying accounts balance at the time of the violation if determined to be willful.

For criminal penalties it is a US$250,000 fine and 5 years imprisonment
and a US$500,000 fine and 10 years imprisonment if done in tandem with another U.S. law.

U.S. taxpayers may also have filing requirements on IRS form 5471 “Information Return with Respect to Certain Foreign Corporations” if they have an investment in a foreign corporation, in most instances ownership of 10 percent or more.

Conversely, U.S. taxpayers that have one or more foreign shareholders that own 25 percent or more of their outstanding stock may have reportable transactions requiring filing on Form 5472 “Information Return of a 25 percent Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.”

A copy of the FBAR form can be downloaded here.

Hank Bourg is a U.S. certified public accountant and the head of the North American desk at Dezan Shira & Associates. For comments or inquiries, please contact him at tax@dezshira.com.