What to Know About Foreign Bank Account Reporting & FBAR Penalties
U.S. citizens (and others) are required to report certain interests in foreign bank and financial accounts. The failure to comply with this information reporting can trigger significant civil and even criminal penalties.
About Foreign Bank Account ReportingU.S. citizens are subject to tax on their worldwide income. This is true even if the income is earned abroad. The Bank Secrecy Act was enacted to ensure the U.S. citizens pay taxes on this foreign income. This Act imposed a filing requirement intended to give the government the ability "to detect and prosecute criminal activity," which is often referred to using the acronym FBAR. The Act also imposed draconian penalties for the failure to file FBARs.
Foreign Bank Accounts Requiring ReportingThe Act grants the Treasury authority to require U.S. citizens to keep records and file reports whenever he or she "makes a transaction or maintains a relation for any person with a foreign financial agency." The Treasury issued regulations explaining that any citizen "having a financial interest in, or signature or other authority over, a bank, securities or other financial account in a foreign country" must report certain details about the account to the Treasury Department. This report must be made each year by filing a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (*FBAR*).
*Financial Interest* in a Financial AccountA person has a financial interest in a financial account in a foreign country if "the owner of record or holder of legal title is a person acting as an agent, nominee, attorney or in some other capacity on behalf of the United States person with respect to the account."
Furthermore, the FBAR reporting requirement can be triggered under the more general standard of "signature or other authority." Courts have repeatedly found that "other authority" exists where a foreign account is held by someone who acts on behalf of another, or an entity that is indirectly controlled by a U.S. person.
Time for Filing FBARsAn FBAR must be filed with the Treasury Department no later than June 30 "with respect to foreign financial accounts exceeding $10,000 maintained during the previous. . . year."
Taxpayers also have to indicate whether the FBAR rules apply when filing their Form 1040, U.S. Individual Income Tax Return. The Schedule B attached to the Form 1040 includes a check-the-box question that directs taxpayers to say "Yes" if they had authority to sign or direct the use of a foreign account. It then provides instruction for taxpayers to file an FBAR.
About FBAR PenaltiesThe Treasury is authorized to impose penalties if FBARs are not filed. The Treasury imposes penalties if:
(1) the person is a U.S. citizen,
(2) the person had an interest in or authority over a foreign financial account,
(3) the financial account had a balance exceeding $10,000 at some point during the reporting period, and
(4) the person willfully failed to disclose the account or file an FBAR form for the account.
Where the failure is "willful," the amount of this penalty cannot exceed the greater of either $100,000 or 50 percent of the balance of the account at the time of the violation. The term *willful* includes all conduct that is voluntary, but not conduct that is merely accidental or unconscious.
There is no reasonable cause exception for a willful violation.
Compliance InitiativesThe IRS and Treasury have had a number of compliance initiatives for foreign income reporting over the years. These initiatives have changed over time, as have the benefits and burdens associated with each initiative.
U.S. citizens with financial interests in foreign accounts who have failed to file FBARs should consult with a FBAR attorney about how to minimize their liability exposure.