March 9, 2014 - Mirit Reif, Adv.
It's that time of year…
U.S. tax season, and all the paperwork and forms can make you quite overwhelmed and confused. It is also frustrating when you just don’t understand how to deal with it all and what needs to be reported in which form. This article will try and simplify the requirements of one of the more controversial forms: the FBAR.
I hereby give you a short Q&A on form FinCEN Report 114 (Report of Foreign Bank and Financial Accounts) a.k.a the FBAR form (hereinafter referred to as the “FBAR”).
Background:
The FBAR provides necessary information for certain governmental agencies. Information on the FBAR may be used in criminal, tax, or regulatory investigations or proceedings, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism. This governmental need for information is balanced with the administrative concerns presented by the filing of the information by U.S. persons.
Basically the U.S. government wants to know where U.S. citizens own accounts outside of the U.S.A. in order to be able to monitor any option of tax evasion and/or support of international terrorism.
Q: Who must file an FBAR?
A: Any U.S. person that has a financial interest or signatory authority over a foreign (outside of the U.S.A.) financial account that the aggregate value of all the foreign accounts exceeds $10,000 at any time during the calendar year.
Q: Who is regarded as a U.S. person?
A: U.S citizens, U.S residents, entities, including but not limited to corporations, partnerships, or limited liability companies, created or organized in the U.S. or under the laws of the U.S. and trusts or estates formed under U.S. laws.
Q: What is the definition of "financial interest"?
A: Owner of record or holder of legal title of the account as follows:
1. An agent, nominee, attorney, or anyone else acting on behalf of the U.S. person with respect to the account.
2. A corporation in which the U.S. person owns more than 50% of the total value of shares of stock or of the voting power of all shares or stock, either directly or indirectly.
3. A partnership in which the U.S. person owns an interest in more than 50% of the partnership's profits or an interest in more than 50% of the partnerships capital either directly or indirectly.
4. A trust in which the U.S. person is the trust grantor and has an ownership interest in the trust. Or a trust in which the U.S. person has more than 50% beneficial interest in the assets or income of the trust
5. Any other entity in which the U.S. person owns more than 50% of the voting power, total value of the equity interest or assets or interest in profits either directly or indirectly.
Q: What is included in the definition of "foreign financial account"?
A: A financial account includes but is not limited to securities, brokerage, saving, demand, checking, deposit, time deposit, pension, Keren Hishtalmut, a commodity futures or option accounts, an insurance policy or an annuity policy with cash value, and shares in a mutual fund or a similar pooled fund or any other account maintained with a financial institution.
A foreign account is any account located outside of the U.S.A. An account maintained with a branch of a foreign bank that is physically located in the U.S.A. is NOT a foreign financial account and thus does not need to be reported on the FBAR.
Q: Are there any exceptions to filing an FBAR?
A: When an account is owned by both spouses and certain conditions are met than it is sufficient that only one of the spouses files the FBAR. Other exceptions of non filing include but are not limited to foreign accounts of US government entities, IRA owners and beneficiaries and participants in and beneficiaries of tax qualified retirement plans. In addition there are certain individuals that will not have to file an FBAR if they have only signatory authority but no beneficial interest in the account and it is best to check the full list of exceptions detailed in the FinCEN filing instructions.
Q: How do I file and what is the deadline?
A: The FBAR is a calendar year report, separate from the federal tax return, and must be filed on or before June 30th of the year following the calendar year being reported. There is no option to request an extension. Effective July 1, 2013, the FBAR must be filed electronically through FinCEN's BSA e-filing system.
Q: What do I report?
A: The requirement is to report the maximum value of the account. Record all amounts in U.S. dollars rounded up to the next whole dollar. For conversion purposes, you need to use the U.S. dollar exchange rate for the last day of the calendar year.
Q: Is there any requirement to obtain bank documents once the account is reported?
A: There is a requirement to retain all financial information, which includes the name and address of the financial institution where the account is maintained, the account number, the type of account and the maximum value. The information should be retained for a period of 5 years following the calendar year reported in case a request is made to inspect the financial records.
Q: Are there penalties for not filing an FBAR?
A: Not complying with your FBAR reporting duties could be considered a criminal offense in addition to a civil one.
A person who willfully fails to file an FBAR may be subject to a penalty as high as $100,000 or 50% of the total balance of the foreign account per violation. In addition, failing to file an FBAR subjects a person to a prison term of up to 10 years and criminal penalties of up to $500,000.
A non willful violation with no reasonable cause may be subject to a $10,000 penalty per account. If there is reasonable cause for the violation, the IRS might not impose any penalties.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Our tax department regularly advises taxpayers in connection with voluntary disclosure of foreign accounts, assets, and income.
Mirit Reif is an attorney in the Jerusalem branch of Hacohen Wolf Law Offices. She can be reached at 02-9999235. Hacohen Wolf is a law firm specializing in Real Estate, Taxation and Commercial Law with offices in Jerusalem, Tel-Aviv, New York, London, Amsterdam and China.