Do you maintain bank accounts outside the U.S.? Do you own any foreign financial assets, such as foreign stock or a loan to a foreign person? If you do, you should be aware that you may have extra reporting obligations to the U.S. government.
Foreign Financial Accounts
If you are a U.S. person, and you have a financial interest in or signature authority over foreign financial accounts, then you must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), if the balance of your accounts meet certain threshold. Failure to file an FBAR can subject a U.S. person to hefty civil penalties or even criminal exposure.
A U.S. person will only need to file an FBAR if the highest aggregate balance of all of the person’s foreign financial accounts at any time during a calendar year exceeds $10,000. Thus, if you have several accounts, each with a balance of less than $10,000, but the aggregate balance of all accounts at any time during the year exceeds $10,000, then you must file an FBAR and report all of your foreign financial accounts. The term “financial account” is defined broadly. It includes not only various types of bank accounts such as checking, savings, securities and brokerage accounts, but also deposits or even whole life insurance policies.
You are a U.S. person if you are a U.S. citizen, regardless of whether you reside inside or outside of the U.S. If you are a green card holder, you are also a U.S. person. Even if you are neither a U.S. citizen nor a green card holder, if you reside in the U.S. for a substantial number of days each year, then you might be considered a U.S. person for FBARs purposes.
Children’s Obligation to File FBARs
Children, whether minors or of age, are not immune from the FBAR filing obligations. In some countries, such as India, it is a cultural norm for parents to place their children’s names on the parents’ bank accounts, sometimes even without the children’s knowledge. If the children are residing in the U.S., for instance attending school in the U.S., then the children may have an obligation to file FBARs to disclose the accounts. If the children cannot sign the FBARs, then a parent or guardian must sign them.
Jointly Held Accounts
In addition, it is not uncommon for spouses to jointly hold foreign accounts. In such cases, if certain conditions are met, then only one spouse is required to file an FBAR.
Not all foreign financial accounts are required to be reported on an FBAR. The following foreign financial accounts are exempted from FBAR reporting obligations:
- foreign financial account maintained by a U.S. government entity;
- IRA; and
- 401(k) or 403(b) plans.
An FBAR must be filed on or before June 30th of the following calendar year and must be filed electronically. No extensions are permitted. It is a form filed separately from your U.S. federal income tax returns. Failure to timely file an FBAR can result in substantial civil penalties and even criminal sanctions.1
Foreign Financial Assets
Similarly, if you are a U.S. citizen or a green card holder, and if you have an interest in certain foreign financial assets and the value of those assets exceeds a certain amount, then you have the obligation of filing Form 8938, regardless of whether you live in the U.S. or overseas.
Typically, for individuals who live in the U.S., the reporting threshold for a single individual is $50,000 on the last day of the year (or $75,000 at any time during the year). For individuals who live outside the U.S., the reporting threshold for a single individual is $200,000 on the last day of the year (or $300,000 at any time during the year). For married couples, these threshold amounts are doubled.
Definition of Foreign Financial Assets
Foreign financial assets reportable on Form 8938 is defined broadly. It includes any bank accounts maintained at a foreign bank, and any foreign financial assets that are not used in a trade or business. For instance, stock or securities issued by a foreign corporation are reportable on Form 8938. Also, if you loan money to a foreign person, then the promissory note is reportable on Form 8938, unless you are in the business of loaning money.
Certain assets are not required to be reported on Form 8938. These assets generally include the following:
- a financial account that is maintained by a U.S. financial institution (e.g., U.S. mutual fund accounts, IRAs, 401(k) retirement accounts, qualified ERISA plans and brokerage accounts); and
- a financial account that is maintained by a dealer or a trader in securities or commodities if certain requirements are satisfied.
Real Property, Foreign Currency and Other Personal Property
If you own foreign real estate property that is held directly under your own personal name, then the real property does not have to be reported on Form 8938. However, if the real property is held by a foreign entity, then the foreign entity itself is a foreign financial asset and must be reported on Form 8938.
If you directly hold other personal property, such as foreign currency, metals, art, antiques, jewelry, cars or other collectibles, these items do not need to be reported on Form 8938.
Failure to File Penalties
Form 8938 is a form different and separate from FBAR. It should be filed along with your U.S. federal income tax returns. Failure to timely file the form can subject you to a penalty of $10,000. The statute of limitations on the form is three years. However, it does not start to run until the date the form is actually filed.
1FBAR penalties and recent guidance on revised penalties will be discussed in a subsequent article.