The Right to Privacy is one of the most cherished expectations in American life. While not explicitly mentioned in the Constitution, it is alluded to multiple times in the Bill of Rights in the First, Third, Fourth, and Fifth Amendments, and has been reaffirmed time and again by the Supreme Court in landmark cases like Griswold v. Connecticut, Roe v. Wade, and Lawrence v. Texas. If there is anything that Americans would never countenance, it is the government looking into the personal financial details of tens of millions of American citizens and searching for evidence of potential malfeasance, right?
Right?
…?
I’ll wait for you to stop laughing.
History of the FBAR
If there is one thing that infuriates US expats more than anything else (even more than the requirement to file tax returns), it is the requirement to file FinCEN Form 114, the Report of Foreign Bank and Financial Accounts—more commonly known as the Foreign Bank Account Report, or FBAR. The FBAR was established as part of the Bank Secrecy Act (BSA), passed by Congress in 1970 and signed by President Richard Nixon that same year. The BSA has been amended several times, including as part of the “Patriot Act” of 2001, but the FBAR remains.
The BSA was passed in order to help the government prosecute money laundering, where large amounts of cash and offshore accounts are commonly used to engage in illicit activity, including fraud, drug trafficking, and terrorism. BSA provided (among other things) that financial institutions inform the Treasury’s Financial Crimes Enforcement Network (FinCEN) every time someone makes $10,000 in cash transactions in a single day, cash purchases of $10,000 or more of instruments such as cashier’s checks and money orders, any other activities the bank deems to be suspicious. In addition, it required any US person who has $10,000 is accounts outside the United States to report those accounts to FinCEN annually.
This last requirement became what we know today as the FBAR. The fact that it requires US expats to report their checking, savings, and retirement accounts is an unfortunate side effect of the law, which Congress has never bothered to attempt to fix. In addition, the $10,000 threshold hasn’t been updated or indexed for inflation since the bill was passed fifty years ago, and there is no indication that Congress has any plans on correcting that, either.
FBAR Filing Requirements
Generally, the FBAR must be filed by a US person who has financial interest or signature authority over one or more foreign financial accounts if their aggregate value is more than $10,000 at any point during the year. This definition, while it seems simple on the surface, has quite a few layers of meaning to it, so we will break it down one part at a time.
United States Person
A United States Person can be any of the following:
A US citizen
A green card holder
A business entity (corporation, partnership, or LLC)
A trust
The estate of a deceased US person
Financial Interest vs. Signature Authority
Financial interest means that the filer is the owner of the money in the account. Included in financial interest is when spouses own their accounts jointly (even if one spouse is not a US citizen) and when parents own accounts jointly with their children (or vice versa).
Signature authority over an account is when a person has the right to decide how the money in an account is spent or managed, but does not have an actual ownership interest.
While both financial interest accounts and signature authority accounts needs to be reported on the FBAR, the accounts are listed separately on the form. How to tell the difference? Think of what would happen if the other person were to pass away suddenly—would you have sole ownership of the account? If not, then you only have signature authority.
Foreign Financial Account
A foreign financial account for FBAR purposes is an account located at a financial institution outside the United States, including foreign branches of US banks. It does not matter if the account produces income—the FBAR is not an income tax return.
Examples of foreign financial accounts include, but are not limited to:
Bank accounts—checking, savings, and CDs;
Investment accounts—stocks, bonds, and mutual funds;
Cash value life insurance policies
Corporate bank accounts when you own more than 50% of the company
Foreign retirement and tax-qualified savings accounts, for example:
ISAs (United Kingdom)
Superannuation accounts (Australia)
RRSPs and TFSAs (Canada)
Fondos para el Retiro (Mexico)
Aggregate value of $10,000
Common misconceptions among US expats is that is none of their accounts reach a balance of $10,000, then they do not have to file an FBAR, or that they only have to report accounts that have balances above $10,000. In truth, if the total value of all your foreign accounts combined go above $10,000 at any point during the year, you have to file the FBAR and report all of your accounts, even accounts with negligible or negative balances. For example, if you have three accounts, and the balances in the accounts are $4,000, $5,999, and $2, you have to disclose all three accounts on the FBAR.
Due Date for the FBAR
Until 2017, the filing date for the FBAR was June 30 every year, with no extensions available for any reason. This rule did not match anything else in the tax calendar, and accomplished nothing more than making US expats across the world (and their CPAs) miserable. Beginning in 2017, Congress moved the deadline to align with the rest of the tax world.
Nowadays, the FBAR is technically due April 15. However, FinCEN, knowing that many US expats would have extreme difficulty assembling their information before then, administratively grants an automatic six-month extension to everyone. You do not have to request this extension. Therefore, for all intents and purposes, the FBAR is due on October 15.
Penalties for Not Filing the FBAR
Here we go, time for the “or else” part of the article: What will happen, you ask, if I don’t file the FBAR?
The answer: Nothing good.
The penalties for not filing an FBAR range from severe to “are you kidding me” territory. Penalties can be civil or criminal in nature, and a person can be assessed both of them at the same time if they catch the FBI in a particularly bad mood (see Manafort, Paul—although some would have you believe he got off easy).
The following is from the IRS’s official FBAR reference guide, but I have updated the civil penalties amounts for inflation.
As of January, 2020:
Non-willful violation
Civil Penalties: $12,921
Criminal Penalties: N/A
Willful failure to file
Civil Penalties: $124,588 or 50% of the value of the account, whichever is greater
Criminal Penalties: Up to $250,000 or 5 years in prison, or both
Willful failure to file while violating other laws
Civil Penalties: $100,000 or 50% of the value of the account, whichever is greater
Criminal Penalties: Up to $500,000 or 10 years in prison, or both
Knowingly and Willfully Filing False FBAR
Civil Penalties: $100,000 or 50% of the value of the account, whichever is greater
Criminal Penalties: $10,000 or 5 years in prison, or both
Catching Up on FBAR Filings
Thankfully, there is a way out.
The IRS and the Treasury have programs available to help US expats get current on their filings. Both the Streamlined Procedures (covered in a previous post) and the Delinquent FBAR Filing Procedures are relatively painless ways to get current on your FBAR filings. And, as you may have guessed, we are quite experienced with these programs here at CPAs For Expats.
Conclusion
No, the IRS does not hate you, and the Treasury does not actually want to know every transaction in your Australian checking account. However, the requirement to file an FBAR is real, and the savvy US expat will not risk missing these deadlines—because the last thing anyone wants to receive is a penalty notice from the IRS which was easily avoidable.
Looking for help with your FBAR filing? Contact CPAs For Expats and let’s get started!