What is an FBAR, do I need to file it, and how?
If you are a US Citizen with offshore financial accounts, then understanding the basic fundamentals of the FBAR filing is crucial to having a trouble-free tax season.
Whether you’re a digital nomad, freelancer, or just an American living abroad, it wouldn’t be surprising if you own a financial account outside of the US. However, you may be unaware that holding your money in a foreign account (banks, pensions, investments, etc.) may require you to file an FBAR (Foreign Bank and Financial Accounts Reporting) or also known as a FinCEN Form 114.
Before we get into this comprehensive guide, it’s probably best to understand what an FBAR is.
What is an FBAR?
FBAR is an abbreviation for “Foreign Bank and Financial Accounts Reporting,” which was implemented to reduce the chance of tax evasion on income generated within your Foreign accounts. This yearly FinCEN 114 report only needs to be filed if you hit specific threshold requirements.
Rather than filing the FBAR with the IRS along with your tax return, you’ll be submitting it to the Financial Crimes Enforcement Network – FinCEN. The FBAR doesn’t require you to pay tax on your foreign funds held in the account – that’s considered in your actual tax return filing. Instead, you’re just providing proof that you’re not trying to avoid tax via owning offshore accounts.
For most American’s that have foreign accounts, you’ll typically need to report the balance of your overseas bank accounts. Foreign financial accounts include, but are not limited to; checking, savings, securities, brokerage, deposit, pensions, life assurance or any other account held with a financial institution. You must file your FBAR on time. Otherwise, you could encounter some hefty fines. To find out more about who, how, and when you should be filing your FBAR, see below.
Who needs to file an FBAR?
The most important question, who needs to file an FBAR? Any US citizen (or anyone deemed a US tax resident) with $10,000 or more held in a foreign account during the tax year. This includes the combined total of every one of your foreign accounts, and even if your balance surpasses the suggested threshold for just a couple of minutes. For example, during a tax year, if the combined total of all your foreign accounts exceeds $10,000, you’ll need to file an FBAR.
An FBAR also applies to all US nationals that have signing authority to any overseas accounts. This is crucial to remember, as you don’t necessarily need to own a foreign account to file an FBAR. Signature authority practically means you have some control over the disposition of money, assets, or funds that are held in a financial account.
NOTE – FinCEN and the IRS say that an FBAR is required from “US citizens” who meet the reporting threshold of $10,000 in their foreign accounts. However, the word “citizen,” in this case, refers to any nationals, resident aliens, estates, domestic entities, and trusts.
How to File FBAR?
To avoid any potential tax avoidance penalties, you need to make sure you know how and when to submit your FBAR. Because of the progression of technology, filing your 114 FinCEN form has never been easier.
When you submit an FBAR, you need to file your information electronically. This is done through FinCEN’s BSA e-filing system.
Those who are required to file an FBAR will need the following information about their foreign account:
- The name that the account is held in
- Account number
- Full name and address of the foreign financial institution
- The type of account
- The maximum value of the account during the whole tax year
The above information is what an FBAR consists of, you should keep the above data and evidence of your Submission ID for 6 years. This helps if FinCEN asks any queries, as you’ll have evidence of why and how much you filed within a specific year, separately if you ever need to make an amendment to your FBAR you will need the original Submission ID to do so.
Remember to provide accurate and truthful information about your foreign financial accounts. Failing to do so can result in you receiving a hefty fine and even jail time for wilful non disclosures.
Penalties for not filing your FBAR
Above, we mentioned that you’ll receive penalties for not filing your FBAR. To understand the severity of submitting this form, we thought it would be a good idea to discuss some of these consequences.
So, what happens when you don’t file your FBAR, and you’ve met the required threshold? Under the current rules, if you held funds that exceeed $10,000 in your foreign accounts and don’t submit an FBAR, you can receive a penalty of up to $10,000 (per violation). However, if you knowingly fail to submit your report to FinCEN, they’re able to fine you $100,000 per penalty violation, and even more depending on your account balance during the breach.
As you can see from the above, failing to file your FBAR isn’t ideal. So, save yourself the hassle and be sure to submit your form on time.
FBAR Filing Deadline
For each tax year, an American that needs to file an FBAR will need to submit this before the April tax deadline in the following year. However, failing to achieve this, you’ll automatically be given a filing extension until October 15 the same year. If you file your FBAR after the extension date without reasonable cause, the Department of the Treasury can legally fine you a penalty due to violating their rules.
Conclusion
As you’re able to see from the above, a US citizen needs to file an FBAR if they meet the threshold requirements. Failing to do so can be catastrophic and something all of us want to avoid.
If you’re still unsure about whether or not you need to file an FBAR, we recommend you download our comprehensive step by step FBAR e-guide HERE