Posted On: April 19th 2018
In recent years, the IRS and the Financial Crimes Enforcement Network (FinCEN) have stepped up their enforcement of foreign account reporting requirements. An important tool in this effort is FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).
Often misunderstood or overlooked, the FBAR can be a costly trap for the unwary. It must be filed by any “U.S. person” with a financial interest in or signature authority over foreign financial accounts with an aggregate value that exceeds $10,000 at any time during the calendar year. U.S. persons include U.S. citizens, residents, estates, trusts and business entities.
The potential consequences of noncompliance are severe: The maximum penalty for willful failure to file an FBAR is the greater of $100,000 or 50% of the account balance. FBARs must be filed electronically with FinCEN by April 15 (April 17 this year), although an automatic six-month extension is available to October 15.
Financial accounts include bank accounts, securities and brokerage accounts, and other accounts maintained with a financial institution or “other person performing the services of a financial institution.” They also include mutual funds, insurance and annuity funds with cash values, commodity futures or options accounts, and certain retirement accounts.
Foreign accounts are those located outside the United States, regardless of the financial institution’s nationality. So, for example, an account maintained with a branch of a U.S. bank physically located outside the United States is a foreign financial account, while an account maintained with a branch of a foreign bank physically located in the United States is not.
The owner or legal titleholder of an account has a financial interest in it, regardless of whether he or she enjoys any benefits from the account. And one who uses an agent, attorney or other representative to acquire an account has a financial interest even without legal title.
Suppose, for example, that Emily, a U.S. citizen living abroad, agrees to hold $15,000 in her foreign bank account for her sister, Maxine, also a U.S. citizen. Both sisters have a financial interest in the account and must file FBARs: Emily as the legal owner, and Maxine as the beneficial owner of the funds.
One can also hold a financial interest in a foreign account through a business entity or trust. Under the FBAR rules, a U.S. person who owns, directly or indirectly, more than 50% of a corporation’s voting power or total value is deemed to hold a financial interest in the corporation’s foreign financial accounts. Similar rules apply to owners of more-than-50% capital or profits interests in partnerships and to majority owners of other types of entities.
Financial interests in accounts held in trust are attributed to a U.S. person who 1) has an ownership interest in a grantor trust, 2) has a present beneficial interest in more than 50% of the trust assets or 3) receives more than 50% of the current trust income. Beneficiaries are relieved of their FBAR filing obligations, however, if the trust or its trustee has a separate FBAR filing obligation.
FBAR reporting obligations also extend to U.S. persons with signature authority over foreign financial accounts. These may include power of attorney holders, officers or employees of entities that hold foreign accounts, trustees of trusts that hold foreign accounts and executors of estates that hold foreign accounts.
In an estate planning context, foreign account reporting obligations can arise in a variety of ways. Anytime you designate another person to act on your behalf or transfer interests in your assets to other people or entities, you may trigger additional FBAR reporting obligations. If you own or control foreign financial accounts, consult with us to discuss your FBAR and other reporting obligations and their potential impact on your estate plan.
© 2018