The IRS has issued sweeping changes to the way U.S. taxpayers are required to report interest in foreign bank accounts. Although taxpayers were always required to report and pay taxes on income earned in foreign accounts, not until recently did the IRS along with other government agencies step up enforcement to eliminate attempts to avoid paying taxes. As a result, the IRS issued new regulations about who is required to report a foreign account, the type of accounts that should be reported, and the corresponding information that should be included in each filing.
FinCEN Filing Information
Any United States person who has financial interest in or signatory authority over financial accounts located outside the United States with an aggregate value of $10,000 or more at any time during the calendar year must submit a FinCEN Form 114 report.
A United States person is defined as:
- A US citizen
- Resident of the United States – Green card holder
- Any corporation organized in the US
- Any partnership organized in the US
- Any LLC organized in the US (even those disregarded for tax purposes)
- Estates and trusts organized in the US (even those disregarded for tax purposes)
It is important to note that a US person may be required to file a FinCEN Form 114 even though an account did not earn any income during the tax year. The FBAR report due date changed in 2016 and is now due by April 15 with an automatic extension to October 15 of the year following the reporting year and must be transmitted electronically. The civil penalty for failure-to-file could reach $10,000. Willful failure-to-file penalties start at $100,000.
Qualifying Account Types
Many taxpayers are surprised to find out that the IRS requires more than traditional savings accounts to be reported. In addition, the following account types are also required to be reported including brokerage accounts (including investment accounts), checking accounts, securities, mutual funds, annuities, insurance policies (with a cash surrender value), or ANY other type of foreign financial account.
If you own foreign financial accounts or interests in other foreign assets such as pensions, retirement plans, or interests in foreign partnerships or trusts, you may have additional filing requirements on Form 8938 – Statement of Foreign Financial Assets.
FinCEN Filing Exemptions
There are certain circumstances where a U.S. person is not required to file a FinCEN with the IRS. Below we have identified the most common situations:
- United States persons already included in a consolidated FBAR;
- Accounts owned by a governmental entity;
- Accounts owned by an international financial institution;
- IRA owners and beneficiaries;
- Participants in and beneficiaries of tax-qualified retirement plans;
- Certain individuals with signature authority over but no financial interest in a foreign financial account;
- Trust beneficiaries; and
- Foreign accounts maintained by a US military bank