Many taxpayers are caught unaware of their reporting obligations when they have money in a foreign account. They often think that if a foreign account has no income that means they do not have to report it to the IRS. But a taxpayer who owns a foreign account may have an obligation to report it to the IRS even if the account generates no income.
The IRS uses FBAR to track the foreign accounts of US persons. FBAR stands for Report of Foreign Bank and Financial Accounts. It is not filed with your standard income tax return. It is filed separately on FinCen Form 114. It is an information return, which means the filing itself does not calculate or pay tax. The FBAR must be filed by October 15th and extensions are not permitted.
The basic rule seems straightforward: a US person must file an FBAR if that person has a financial interest or signature authority over foreign financial accounts whose total value exceeds $10,000 at any time during the year. There are however two major stumbling blocks that trip taxpayers up. The first is dollar amount that triggers the reporting obligation and the second is who counts as a ‘US person.”
The amount that triggers the obligation to file an FBAR is $10,000 (in US dollars – not local currency). But that amount is a total value over ALL foreign accounts. So having $5,000 dollars in a German bank and having another $5,000 in a Irish mutual fund triggers the obligation to file an FBAR. If the $10,000 amount is met at any point during the year – and not just at the end of the year – an FBAR must be filed listing all foreign accounts, even accounts with small balances. These foreign accounts include not only bank accounts but also foreign brokerage accounts, mutual funds, and foreign retirement accounts.
An often critical question is who counts as a US person. A US person includes any US citizen, any US resident, and partnerships and corporations formed under US law. This includes “accidental Americans” – people who hold US citizenship but have never even been to the United States.
It also includes all US residents, including those who do not live in the US full-time. A person is a US resident if they meet the Green Card test or the Substantial Presence test. The Green Card test is just a test if you had a Green Card at any point during the year. So, if you held a green card on January 1st, and then moved permanently to another country on January 2nd, you are still a US person for that year and are required to file an FBAR if you have foreign accounts of over $10,000.
The other test is the Substantial Presence test and it is more complicated. To meet the Substantial Presence test you would need to spend at least 31days in the US in the current year and have spent a weighted 183 days over the last three years. The weighted days are calculated as follows: count all the days in the current year, count 1/3 of the days in the prior year, and count 1/6 of the days in the year before the prior year. A lot of people think they can avoid US tax obligations (including FBAR) if they are present in the US for less than 183 days. But that is not true. If someone was physically present in the US for 125 days each year, they would meet the Substantial Presence Test and become a US person (125+125/3+125/6=187).
One last critical point: the FBAR filing requirement does not depend on the foreign account producing taxable income. Any foreign account where you have a financial interest or signature authority over needs to be reported if the total of your foreign accounts exceeds $10,000 at any point in the year.
Someone who is required to file FBAR is also likely to have other reporting requirements. Form 8938 is required to be filed with your tax return if you are a US resident and have more than $50,000 of foreign assets an the end of the year (or more than $75,000 at any point in the year). If you are not a US resident, then Form 8938 is required to be filed with your tax return if you have more than $200,000 of foreign assets an the end of the year (or more than $300,000 at any point in the year). If you own foreign mutual funds you are also likely required to file form 8621. If you fail to file FBAR, Form 8938, or Form 8621, the IRS can fine you up to $10,000 for each form that you failed to file.
Because the FBAR filing obligation depends on citizenship, residency, account value, and control over the account, anyone with a foreign account should review the rules annually with a tax professional. At Safeguard Law, PLLC, our team of experienced tax attorneys specializes in helping our clients navigate issues such as this. Contact us today to schedule a consultation! Our main business line is (202) 505-1741.