On March 30, 2022, the IRS issued Post 5569, Foreign Bank and Financial Accounts Report (FBAR) Reference Guide. The 12-page publication provides useful information for taxpayers and tax practitioners regarding FinCEN Form 114, Foreign Bank and Financial Accounts Report (FBAR). The IRS’ release of Publication 5569 also shows that the IRS will continue its education campaign on FBAR compliance and filing requirements. This article summarizes the information contained in IRS Publication 5569.
Who must file an FBAR?
By law and regulation, all U.S. persons must file an annual FBAR if they have a financial interest in or signature or other authority over one or more financial accounts located outside the United States, provided that the balance(s) total of the account(s) exceed $10,000 at any time during the calendar year.
who is an american person?
US persons include: (i) US citizens or residents; (ii) entities (for example, corporations, partnerships, trusts, and limited liability companies) created, organized, or incorporated in the United States (including the District of Columbia) and United States island territories and possessions or Indian tribes; (iii) estates constituted under the laws of the United States; and (iv) certain disregarded entities that are US Persons.
What is a financial account for FBAR purposes?
A financial account includes: (i) a bank account such as a savings or checking account; (ii) a securities account, such as a brokerage account; (iii) a futures or commodity options account; (iv) an insurance or annuity policy if it has a cash value; (v) mutual funds or similar mutual funds; and (vi) any other account held at a foreign financial institution or with a person providing the services of a financial institution.
Some retirement and savings plans may also qualify as foreign accounts. For example, the IRS warns taxpayers that the following may have FBAR reporting requirements: (i) Canadian Registered Retirement Savings Plans (RRSPs); (ii) Canadian Tax-Free Savings Accounts (TFSAs); (iii) Mexican Individual Retirement Accounts (Fondos para el Retiro); and (iv) Mexican Administradores de Fondos para el Retiro (AFORE).
When is a financial account located outside of the United States??
For FBAR reporting purposes, the location of the financial account—not the nationality of the financial institution—determines whether it is located outside of the United States. For example, an account held with a branch of a US bank physically located in Germany is an account located outside the United States and therefore must be reported. Conversely, an account held with a branch of a French bank physically located in Texas is not an account located outside the United States and is therefore exempt from FBAR reporting.
For these purposes, “outside the United States” means any location outside of: (i) the United States and the District of Columbia; (ii) territories and possessions of the United States, such as the Commonwealth of the Northern Mariana Islands, American Samoa, Guam, the Commonwealth of Puerto Rico, the United States Virgin Islands, and the Trust Territory of the Pacific Islands; and (iii) Indian Lands as defined in the Indian Gaming Regulatory Act.
What is a financial interest in a financial account?
There are various instances in which a U.S. person is deemed to have a financial interest in a foreign financial account. These include: (i) the US Person is the record owner or legal title holder, whether the account is maintained for the benefit of the US Person or another person; (ii) the record owner or legal title holder is a person acting as an agent, attorney, attorney, or person acting on behalf of the US Person with respect to the account; (iii) the registered owner or legal titleholder is a corporation in which a U.S. Person directly or indirectly owns more than 50% of the total value of the shares or more than 50% of the voting rights of all shares of stock; or more than 50% of the share capital; (v) the legal owner or holder of legal title is a trust in which the US Person is the settlor of the trust and holds an interest in the trust for US federal tax purposes; (vi) the legal owner or holder of legal title is a trust in which the U.S. Person has a current beneficial interest, directly or indirectly, in more than 50% of the assets of the trust or from which such person receives more than 50% of the current income of the trust for the calendar year; or (vii) the registered owner or legal title holder is any other entity in which the U.S. Person directly or indirectly owns more than 50% of the voting rights, the aggregate value of equity interests or assets, or interest in the profits. .
What is a signature or other authority in a financial account?
A U.S. Person has signature or other authority if the person (alone or jointly with someone else) has the authority to control the disposition of assets held in a foreign financial account by direct communication (whether in writing or orally) to the bank or other financial institution. the institution that maintains the account.
What if I have a jointly held foreign account?
If two persons jointly manage a foreign financial account – or if more than one person each holds a partial interest in the account – then each US person is deemed to have a financial interest in that account and each US person must report the total value of the account on an FBAR . However, there is a limited exception applicable to spouses.
What are the penalties for failing to file a timely and proper FBAR?
IRS Publication 5569 summarizes the applicable penalties for failure to file an accurate and timely FBAR:
Those who are required to file an FBAR and do not file a complete and correct FBAR on time may be subject to civil monetary penalties, criminal penalties, or both. When a US person learns that they should have filed an FBAR for a prior year, they must electronically file the latest FBAR using the BSA electronic filing system. They can enter the reported calendar year, including previous years, on the online FinCEN Form 114. the filing is made in conjunction with an IRS compliance option. If they report the foreign financial account on a late-filed FBAR and the IRS determines that the FBAR violation was due to reasonable cause, no penalty will be assessed.
With respect to civil penalties, the IRS acknowledges that “[i]It is possible to assert civil penalties for violations of FBAR whose amounts exceed the balance of the foreign financial account. Civil and criminal penalties may be imposed together.
IRS Publication 5569 provides helpful guidance for taxpayers and tax professionals regarding the various definitional requirements for FBAR returns. However, taxpayers should exercise caution when reading Publication 5569 in isolation and without reliance on other IRS documents and programs. For example, taxpayers who fail to meet their FBAR reporting obligations should carefully consider whether simply filing a late FBAR with an explanation is sufficient to mitigate potential civil and criminal risks (to the extent such risks are present). For taxpayers who are unwilling and exposed to significant civil penalties (including not only FBAR, but Forms 3520, 8938, 5471, 5472, etc.), such taxpayers should consider potentially mitigating these civil penalties by filing a submission. under the Simplified IRS Filing Compliance Procedures. And to the extent that a taxpayer has potential criminal exposure, the taxpayer should consider potentially mitigating those criminal risks by submitting a disclosure under the IRS Voluntary Disclosure Program. In simpler cases of non-compliance, it may very well be a good idea to follow the advice of the IRS to file the FBAR late with a reasonable explanation as to the reason(s) for the non-compliance.