Guide to Foreign Bank Reporting

Report of Foreign Bank and Financial Accounts, FinCEN Form 114, (referred to as the “FBAR”) is generating a lot of news this year as the U.S. Treasury Department and the IRS ramp up their oversight of taxpayers with foreign accounts. You may also be required to file IRS Form 8938, Statement of Specified Foreign Financial Accounts. The Foreign Account Tax Compliance Act (FATCA) of 2010 created separate and distinct reporting requirements for certain taxpayers holding specified foreign financial assets.

Bank Secrecy Act

The Bank Secrecy Act (BSA) gave the Department of Treasury authority to collect information from each United States person with a financial interest in, or signature authority over any foreign financial accounts. U.S persons with an aggregate value of more than $10,000, at any time during the calendar year, including all bank, securities or other types of financial accounts in a foreign country must file FinCEN Form 114, Report of Foreign and Financial Accounts (FBAR) . The term "United States person" means a citizen or resident of the United States, a domestic partnership, a domestic corporation, or a domestic estate or trust.
FinCEN Form 114 supersedes Treasury Form TD F 90-22.1

The Treasury Department has had final rules in place since 2011 explaining whether an account is foreign and therefore reportable as a foreign financial account. The final rules also revise the definition of “signature or other authority” and explain that an officer or employee who files an FBAR because of signature or other authority over the foreign financial account of the employer is not expected to personally maintain the records of the employer’s foreign financial accounts.

Filing

The FinCEN Form 114 must be received by the IRS on or before June 30 of the year following the calendar year being reported. The FinCEN is not filed with the taxpayer’s federal income tax return. It also should not be filed with the IRS.  Instead, must be delivered electronically to the U.S. Treasury Department, and no extensions are granted.

Some individuals who failed to timely file FBAR(s) may qualify for Streamlined Procedures to get back into compliance.  In 2014, the IRS announced modified streamlined procedures for U.S.taxpayers to file amended or delinquent returns together with any international information returns. Under the new procedures, qualified taxpayers generally must file delinquent returns for the past three years, delinquent FBAR(s) for the past six years, pay any federal tax and interest that is due, and comply with other requirements.

Maximum Account Value

The maximum value of an account is the greatest value in the account during the calendar year.
Determine the maximum account value in the currency of the account; convert the maximum value for each account into United States dollars using the exchange rate on the last day of the calendar year.

Signature or other authority

One frequently asked question is what is “signature or other authority.” The Treasury Department explained in the final rules that signature or other authority means the authority of an individual (alone or in conjunction with another) to control the disposition of money, funds or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained. The Treasury Department further explained that the test for determining whether an individual has signature or other authority over an account is whether the foreign financial institution will act upon a direct communication from that individual regarding the disposition of assets in that account

Examples:
  • John is a United States citizen. His brother Paul maintains bank accounts in Mexico on behalf of John. The accounts are held in Paul¡¦s name but Paul only accesses the accounts in accordance with his brother¡¦s instructions. John has a financial interest in the Mexican bank accounts for FBAR reporting purposes. If his brother Paul is a United States citizen or resident, he also has an FBAR reporting requirement with respect to the accounts.
  • A Florida corporation that owns 100 percent of a Spanish company that has foreign financial accounts has to file an FBAR because the corporation is a United States person and it directly owns more than 50 percent of the total value of the shares of stock of the Spanish company that is the owner of record or holder of legal title.
  • A United States person who owns 75 percent of the Florida corporation in the previous example has to file an FBAR because he indirectly owns more than 50 percent of the total value of shares of stock of the foreign corporation that owns foreign financial accounts.
  • Diana, a United States citizen, is a grantor of a Foreign Asset Protection Trust but does not control trust assets nor does she receive distributions from the trust. Diana, as grantor and deemed owner of the trust assets for federal tax purposes, is required to report the trust¡¦s foreign financial accounts.
  • Megan, a United States resident, has a power of attorney on her elderly parents¡¦ accounts in Canada, but she has never exercised the power of attorney. Megan is required to file an FBAR if the power of attorney gives her signature authority over the financial accounts. Whether or not the authority is ever exercised is irrelevant to the FBAR filing requirement.
Accounts

Generally, the Treasury Department has defined the following terms:

  • Bank Account -  a savings deposit, demand deposit, checking, or any other account maintained with a person engaged in the business of banking. 
  • Securities Account - an account with a person engaged in the business of buying, selling, holding or trading stock or other securities. Such as brokerage accounts and securities derivatives, commodity futures or options accounts
  • Other Financial Account - 
    • an account with a person that is in the business of accepting deposits as a financial agency;
    • an account that is an insurance or annuity policy with a cash value ( such as whole life insurance policy)
    • an account with a person that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association;
    • an account with a mutual fund or similar pooled fund or other investment fund.

Of course, there are exceptions. The exceptions include accounts in institutions known as United States banking facilities and also correspondent accounts maintained by banks and used solely for bank-to-bank settlements. Please contact our office for more details about the exceptions.

FATCA

Form 8938, Statement of Specified Foreign Financial Assets, is similar to the FBAR but has some important differences. The threshold for filing Form 8938 is higher than the FBAR (and the threshold varies depending on the taxpayer’s status and location).  Form 8938 also applies – at this time – to only specified individuals and covers only specified foreign financial assets. The IRS has issued guidance describing who is required to file Form 8938, what constitutes a specified foreign financial asset, and more.  Unlike the FBAR form, Form 8938 is filed together with your Form 1040 tax return if required. The IRS has posted information on its website to help taxpayers distinguish the FBAR and new Form 8938.  In certain areas, the two forms overlap.