Don’t Overlook Foreign Account Reporting Requirements

One thing many people do on the their taxes is overlook foreign account reporting requirements. However you DON’T want to forget this very important report. In fact, some of the largest penalties with the Government are associated with not reporting dealings with foreign financial institutions. U.S. citizens and residents with a financial interest in any foreign financial account need to report that relationship. With this in mind, if you have foreign accounts to report, use FinCEN Form 114. You must file this form if the aggregate value of the accounts exceeds $10,000 at any time during the year. Although the official designation of the report is FinCEN 114, it is commonly referred to as the FBAR. FBAR stands for foreign bank account report.

Foreign Account Reporting Requirement Deadline

The due date for 2020’s report is April 15, 2021, with an automatic 6-month extension to October 15, 2021.

What happens if you don’t report your foreign financial accounts?

Failure to file can result in draconian penalties. Non-willful failure to file or timely file an FBAR is subject to a maximum penalty of $10,000. In the event that you willfully fail to file the report, you can be fined a $10,000 penalty. That penalty is for each unreported foreign account!

Form 114 is filed electronically with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) BSA E-Filing System. And important to realize that it’s not as part of the individual’s income tax filing with the IRS.

What counts as a foreign financial account ?

Keep in mind that “financial account” includes the following:

• securities
• brokerage
• savings
• checking
• deposit
• time deposit, or other accounts at a financial institution.
• Commodity futures and options accounts, mutual funds, and even non-monetary assets such as gold are also included.

The first thing to remember is that a “foreign financial account” is when the financial institution is located in a foreign country. In contrast, just owning shares of a foreign stock or a mutual fund that invests in foreign stocks, is not considered. That is, if the stock or fund is held in an account at a financial institution or brokerage located in the U.S.. In these case the FBAR rules don’t apply. An account maintained with the branch of a foreign bank physically located in the U.S. also is not a foreign financial account.

Often overlooked foreign reporting requirements

You may have an FBAR requirement and not even realize it. For instance, perhaps you have relatives residing in a foreign county and they have put you on their bank accounts in case something happens to them. If the combined value of those accounts exceeds $10,000 at any time during the year, you will need to file the FBAR. Or if you are gambling on the Internet, that online casino may be located in a foreign country, and if your account exceeds the $10,000 limit at any time during the year, you will have an FBAR reporting requirement.

What is Form 8938 and why would I use it?

You may also have an additional requirement to file IRS Form 8938. Form 8938 is similar to the FBAR requirement. However Form 8938 applies to a wider range of foreign assets with a higher dollar threshold. For example if you are married and you and your spouse file a joint return, you must file Form 8938 if the value of certain foreign financial assets exceeds $100,000 at the end of the year, or $150,000 at any time during the year. While if you live abroad, the thresholds are $400,000 and $600,000, respectively.

For other filing statuses, the thresholds are half of those amounts. The penalty for failing to file the 8938 is $10,000 per year. And if the failure continues for more than 90 days and you receive an IRS notice of failure to file, the penalty can increase as high as $50,000.

Unlike the FBAR, which is a separate stand-alone filing, the 8938 is included with an individual’s annual tax return (1040, 1040-SR or 1040-NR).

The following chart illustrates commonly encountered foreign reporting requirements.

Commonly Encountered Foreign Reporting Requirements

Scenario	FORM 8938	FinCEN FORM 114 (FBAR)
Financial (deposit and custodial) accounts held at foreign financial institutions	Yes	Yes
Financial account held at a foreign branch of a U.S. financial institution	No	Yes
Financial account held at a U.S. branch of a foreign financial institution	No	No
Foreign financial account for which you have signature authority	No, unless you otherwise have an interest in the account as described above	Yes, subject to exceptions
Foreign stock or securities held in a financial account at a foreign financial institution	The account itself is subject to reporting, but the contents of the account do not have to be separately reported	The account itself is subject to reporting, but the contents of the account do not have to be separately reported
Foreign stock or securities not held in a financial account	Yes	No
Foreign partnership interests	Yes	No
Indirect interests in foreign financial assets through an entity	No	Yes, if sufficient ownership or beneficial interest (i.e., a greater than 50 percent interest) in the entity. See instructions for further detail.

Additional Commonly Encountered Foreign Reporting Requirements

Scenario	FORM 8938	FinCEN FORM 114 (FBAR)
Foreign mutual funds	Yes	Yes
Domestic mutual fund investing in foreign stocks and securities	No	No
Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust for which you are the grantor	Yes, as to both foreign accounts and foreign non-account investment assets	Yes, as to foreign accounts
Foreign-issued life insurance or annuity contract with a cash-value	Yes	Yes
Foreign hedge funds and foreign private equity funds	Yes	No
Foreign real estate held directly	No	No
Foreign real estate held through a foreign entity	No, but the foreign entity itself is a specified foreign financial asset and its maximum value includes the value of the real estate	No
Foreign currency held directly	No	No
Precious Metals held directly	No	No
Personal property, held directly, such as art, antiques, jewelry, cars and other collectibles	No	No
‘Social Security’- type program benefits provided by a foreign government	No	No

As you can see, not complying with the foreign account reporting requirements can have some very nasty repercussions. Please call this office with questions or if you need assistance in meeting your foreign account reporting obligations.