Moving overseas is a major life goal for many Americans. According to a Gallup poll, over 16% of Americans would like to move out of the US in the future. Further, that number is increasing year over year as Americans embrace location-independent work post-COVID.
Whether it’s to retire early or escape the current political climate, there are various reasons why people set their sights abroad. But this is an article about taxes, right?
Let’s ground ourselves for a moment… As an American expat, you still have US tax obligations. And on top of filing a US tax return each year, you might also need to file the FBAR.
In this guide, we go over everything US expats need to know about FinCEN Form 114, also known as the FBAR. You’ll learn essential information such as who’s required to file the FBAR and the penalties in cases of non-compliance.
What is the FBAR?
The Report of Foreign Bank and Financial Accounts (FBAR) is an IRS document that US expats must file to report their financial accounts held with banks located outside the US. Expats can ensure they are compliant with their FBAR filing requirements by submitting FinCEN Form 114.
Because of citizenship-based taxation, US expats must declare their worldwide income yearly to the IRS, regardless of where they live. The purpose of the FBAR is to fight tax evasion, illicit funds, and money laundering.
When US taxpayers hold accounts in the US, the IRS is able to keep an eye on their financial activities because each taxpayer’s bank account is associated with their taxpayer ID (most commonly their social security number). That allows the IRS to monitor large financial transactions and know where each taxpayer holds their money stateside.
Now, you may wonder, how will the US know I hold foreign accounts that are located overseas?
Since the introduction of the Foreign Account Tax Compliance Act (FATCA) in 2010, international banks must report the financial activities of US expats in their territory back to the US each year. This allows the US Treasury to gain a similar level of visibility to the financial activities of US taxpayers, even when they have bank accounts located abroad. This legislation has caused many inconveniences for US taxpayers who reside abroad, including, sometimes, the inability to open or hold a bank account outside the US. You can read more on that here.
Which US expats must file FinCEN Form 114?
You don’t have to file FinCEN Form 114 unless you meet the requirements. The threshold to file states that you must file the FBAR if the amount you hold across foreign accounts surpasses $10,000 at any point during the calendar year.
For example, let’s say you hold $4,000 in a Panamanian bank account and $6,000 in a Mexican mutual fund. In this case, you’ll have an obligation to file FinCEN Form 114 since the total amount of money you possess across your foreign accounts meets the FBAR threshold of $10,000.
However, you don’t need to report foreign accounts to the IRS that fall into this list:
- – Correspondent or Nostro accounts
- – Accounts owned by governmental entities
- – Accounts owned by an international financial institution
- – Accounts maintained in a US military banking facility
- – Individual retirement accounts (IRAs)
What information do you need to file the FBAR?
To file the FBAR, you need to complete FinCEN Form 114 with the following information:
- – Name on the foreign account
- – Foreign account number
- – The foreign bank’s name and address
- – Type of account
- – Maximum value on the account during the calendar year (that you must convert into US dollars)
What if my foreign account is jointly held with someone else?
If you hold a joint account with a spouse or someone else, you’ll also need to disclose that account on the FBAR.
This causes some concern for non-US taxpayers who don’t want their information reported back to the IRS. That said, the FBAR disclosure does not drive any tax, so beyond the reporting of their account balances, the IRS has no further ability to tax or scrutinize them.
What about accounts that I can access, but are not mine?
Some people have access to financial accounts that they are not the owner of. Within the FBAR disclosure, this is called having signature authority. Believe it or not, even if you don’t own a bank account, but you do have signature authority over an account, it is subject to reporting on the FBAR.
An example of signature authority is if you have a minor child and the bank requires you to hold signature authority over their account until they reach age 18. Another example is if you are the treasurer at work, or in another organization, where you can write checks and manage the money within an account, but it is not your own.
How do I file FinCEN Form 114?
You must file FinCEN Form 114 each year electronically through the BSA E-Filing System. You also have the option of letting a tax professional file the form for you as part of the tax preparation exercise. In doing so, your tax preparer will request Form 114a as documented authorization from you to submit the FBAR on your behalf.
What is the FBAR deadline?
You must file the FBAR to the IRS by April 15th of each tax year. However, if you fail to file the FBAR by April 15th, you will automatically benefit from an extension until October 15th. The extension is automatic, so it’s not something you need to request.
Are there any penalties for not filing the FBAR?
Non-compliance with your FBAR obligations can result in IRS penalties. How much you pay depends on whether you willingly or unwillingly failed to file FinCEN Form 114, with the IRS charging higher fines for the former.
The standard penalty for failing to file the FBAR non-willfully is $10,000 for each that you don’t file. Willful non-filing, on the other hand, can cost you up to hundreds of thousands of dollars, depending on your situation.
I didn’t know I had to file an FBAR until now. How do I catch up?
If you’ve been living overseas for some time and never knew about your FBAR obligations until now, there’s no need to worry. The IRS has a few different ways to get caught up penalty-free.
If you’ve been filing your US tax return each year, but didn’t know about the FBAR, the IRS offers the Delinquent FBAR Submission Procedure to catch up with FBAR filing penalty-free.
If you’ve failed to file FBARs because you didn’t know you had to file taxes from abroad, the IRS has a Streamlined Filing Program to help you catch up on both tax filing and FBAR disclosures.
Read more: IRS Streamlined Procedure | Bright!Tax
Let Bright!Tax Handle Your FBAR Filing
If you have more than $10,000 across foreign accounts but don’t want to go through the hassle of filing FinCEN Form 114, we can help. We’ve helped US expats worldwide with our FBAR Filing service to ensure they stay compliant and with minimal stress. Get started today by reaching out to one of our expat-expert CPAs.