The tax return process each spring is an understandably stressful time and for most people a common question emerges. What am I missing? This is the type of question that can take accountants days to fully unpack, but taxpayers have justifiable concerns about overlooking something that will cause a surprise tax bill.
Speaking from experience there is one area commonly overlooked and worth highlighting. The proper reporting of foreign assets. Whether you are a U.S citizen living abroad or just have some money sitting in offshore accounts, in our increasingly digital and global economy understanding the basics behind foreign asset reporting is key to having an easy tax season.
- What is an FBAR?
The Report of Foreign Bank and Financial Accounts (“FBAR”) is an annual report due on the same date as your tax return. Because the due dates are the same, it is prepared and filed in conjunction with your income tax return.
All U.S. persons, whether you live in the states or abroad, must file an FBAR if the combined value of all your foreign accounts is more than $10,000 at any point during the calendar year.
Generally an account at a financial institution located outside the United States is considered a “foreign account” for FBAR purposes. A common misconception is that foreign stocks held in U.S. based investment accounts are subject to FBAR reporting requirements. That is not the case. The key is the location of the financial institution.
There is one other area that can be a common tripping point. The FBAR covers not only foreign accounts you own, but also any you have signature authority over. So for example this could mean a corporate executive with access to a company’s foreign bank account. Or a trustee with control over a trust’s foreign financial accounts.
- Why is it important?
The FBAR exists to combat tax evasion. For generations some taxpayers have tried to avoid paying income taxes to the U.S. by hiding their money in accounts overseas. These overseas institutions have much looser, and in many cases nonexistent, standards on what they are required to report to the U.S. government.
FBARs are submitted to the U.S. Treasury Department’s Financial Crimes and Enforcement Network (“FinCEN”). No taxes are ever due with the FBAR filing. The primary goal is to promote self-reporting and financial transparency.
To “encourage” this type of self-reporting the civil penalties for failing to properly file an FBAR can be quite extreme. For non-intentional violations the penalties can be up to $10,000 per unreported foreign account. For intentional violations the penalties can be in excess of $100,000 per unreported foreign account and criminal penalties may apply as well. In some cases these civil penalties can be waived if reasonable cause is established.
- What records do you need to keep?
You must keep records for each foreign account that establishes:
- Owner of the account,
- Account number,
- Name and address of the foreign bank,
- Account type (i.e. checking, savings, investment, retirement, etc.), and
- Maximum value during the year.
Typically a periodic bank statement (monthly, quarterly, annual) will contain all of the information outlined above. You are required to keep these records for five years from the due date of the FBAR.
Origin CPA Group is dedicated to providing proactive tax compliance and we can help you navigate the FBAR filing requirements. The goal is to provide our clients peace of mind during the normally stressful tax return process each spring.
To learn more about this topic contact Origin CPA Group today.