Directly owning assets abroad comes with special filing requirements in addition to the customary quarterly or annual IRS tax forms. The result is a “layering” of forms that US government agencies use to enforce laws, such as the Bank Secrecy Act, that aim to prevent foreign-held assets from being used to fund illegal and terroristic activities. The filings also restrict US persons from being able to avoid taxes by setting up shelters and “shell” companies that people have historically used to avoid reporting assets.
FBAR filing requirements are also known as FinCEN Form 114. FBAR is the report of foreign bank and financial accounts. FinCEN is the Financial Crimes Enforcement Network, which operates as a bureau within the US Department of the Treasury. IRS Form 8938 is the Statement of Specified Foreign Financial Assets. The two forms have separate filing requirements and different dollar value reporting thresholds. Also, residents of US territories are not required to file Form 8938. Here are some of the scenarios in which people and legal entities need to review FBAR filing requirements when they report on income taxes.
Account declarations and reporting requirements
The FBAR reporting threshold is rather low, only $10,000. Not only that, if an account exceeded $10,000 at any point during the year, these accounts must be reported to FinCEN electronically through the BSA E-Filing System. FBAR requires that legal entities report foreign-held assets as well. The IRS website states that individuals and domestic entities must check the requirements and relevant reporting thresholds of each form and determine if they should file Form 8938 or FinCEN Form 114, or both. The due date is April 15th, but it can be filed as late as October 15th without penalty. You are also granted an automatic six-month extension but do not need to request it. You only need to file Form 8938 with your federal tax return, not FBAR Form 114.
You must keep records for each account and you must file an FBAR that establishes:
- Name on the account
- Account number
- Name and address of the foreign bank
- Type of account
- Maximum value during the year
The timeline for FBAR record retention is five years. If you do not file an FBAR, you become subject to increasing penalties the longer a violation takes place. Here are some specifics about what accounts you need to report, and the information requested when you file.
FBAR aggregate account balances
FinCEN requires you to report on the aggregate balances of your foreign assets. That means that it doesn’t matter how many accounts you hold; if the cumulative total exceeds $10,000, then you are required to include account information on all of them. You must also include the maximum value the accounts reached at any point for the prior year in US dollars. Assets held by legal entities, including trusts, estates, LLCs, or LPs, for example, must be reported.
Form 8938 reporting requirements
Form 8938 requires reporting as an individual and married, but the thresholds are higher. As an individual, you need to file if your foreign-held balance exceeds $50,000 on the last day of the tax year or exceeded $75,000 at any point during the year. If you are married, you can have up to $100,000 on the last day of the year and up to $150,000 at any point during the year without having to file. These are specifications for people living in the US. Living outside of the US has higher limits. Domestic legal entities only need to reach $50,000 for the filing requirement. The IRS website provides a user-friendly table that describes the types of financial institutions that require reporting. Foreign-held accounts at US banks with branches overseas do not need to be reported. What is not the easiest conclusion to reach is when you will need to file both forms. It is wise to seriously consider consulting with a tax expert to help you to compile statements and other documents for your accounts for all your foreign-held assets when they prepare your taxes.
Getting the right forms filled out and filed
Yes, filing the FBAR is more work at tax time, but you don’t ever need to guess about whether you’re going to fill it out correctly. With the help of a knowledgeable and qualified financial professional, you can ensure that you’ve done everything necessary when it comes accurately reporting your foreign holdings. A great tax professional will walk you through all the steps so that you can have peace of mind.
Tax accounting is a evershifting world, but you don’t have to navigate it alone. Our certified accounting team can guide you through these complex processes—for you or your business.