When U.S. taxpayers think of their tax obligations for the year most of them think of filling out the IRS Form 1040 and reporting their earnings. There’s an additional, less well-known but equally crucial obligation for those who have foreign bank accounts: The FBAR (Foreign Bank Account Report).
Although it is important to your financial matters, even though it’s a crucial aspect of your financial life, FBAR isn’t filed along with your tax return as usual and it can catch many by surprise. What is FBAR and who should be filing it and why is it important to remain in compliance?
Let’s dissect it.
What Is the FBAR?
The FBAR is officially known by its official name of FinCEN Form 114, is an individual filing requirement created to stop tax evasion by using offshore accounts. It’s managed through the FinCEN (Financial Crimes Enforcement Network), and not by the IRS, however enforcement is managed through the IRS.
Prior to 2013, the form that was used to accomplish this used for this purpose was TD F 90-22.1, but it was changed with FinCEN Form 114, which must be filed electronically through BSA E-Filing System.
Who Must File FBAR?
You are required to file the FBAR if:
- You are a U.S. person: this includes U.S. citizens, residents and organizations such as partnerships, corporations or LLCs.
- You hold a financial stake or have signature authority over one or more financial accounts in foreign countries.
- The total value of the accounts surpassed $10,000 at any time during the calendar year.
If a business or a company has already reported the account, individuals with authority to sign on the account will still have to complete their own FBAR except for the case where a specific exception is in place.
Why It’s Not Part of Your Tax Return
The main cause of confusion with the FBAR is that it’s not filed with IRS Form 1040. The reason? because It’s not technically a tax-related form.
The FBAR is a part of a wider initiative by FinCEN to detect and deter criminals in the financial sector, including tax evasion and money laundering. It’s a measure to ensure compliance and not a tax reporting instrument.
Even when you’re up to date on your tax filings, you may still be liable to penalties if you don’t file your FBAR.
Key Filing Dates & Process
- Formulation that you need to submit: FinCEN Form 114 (via the BSA E-Filing System)
- Regular deadline: April 15
- Automatic extension: Up to October 15 (no additional request required)
- How to submit: online only, Not with IRS
What Happens If You Don’t File?
Infractions to FBAR rules could result in severe fines:
- Civil penalties can exceed $10,000 per violation for non-willful neglect.
- Intentional violations could result in penalties of up to 100,000 or 50% of the total, or the balance of your account, whatever is higher.
- In extreme cases the possibility of criminal charges and prison could be in play.
Final Thoughts
If you have bank accounts in foreign countries or have signature control over them, filing an FBAR isn’t something you should ignore. While it’s not included in an IRS tax return however, it plays a crucial function in the federal oversight of financial institutions and if you don’t comply, it can cost you dearly.
If you’re uncertain if the rules are applicable to you, speak with an experienced tax professional who knows about the requirements for international reporting. It’s always better to stay secure and remain compliant rather than having to face the consequences of not having completed your filing.
