Common FBAR Mistakes and How to Avoid Them
Sep 08, 2017
In this important post, the FBAR Wiz will discuss some common but harmful pitfalls to avoid when preparing and filing the FBAR form to disclose offshore assets and/or offshore accounts. It should be noted that the very first step is to accurately determine if you have an obligation to report foreign assets and/or foreign accounts to the IRS. Check out the FBAR Wiz app for free to determine your IRS offshore asset reporting obligations today before reading on. Filing of Joint FBARs by Spouses, Except in Limited Circumstances Spouses are permitted to file a joint FBAR only in limited circumstances. The FBAR instructions permit one spouse to file on behalf of the other only if all of the following three conditions are met: “(1) all the financial accounts that the non-filing spouse is required to report are jointly owned with the filing spouse; (2) the filing spouse reports the jointly owned accounts on a timely filed FBAR electronically signed; and (3) the filers have completed and signed FinCEN Form 114a Record of Authorization to Electronically File FBARs" (source: FinCEN Form 114). In other words, if the non-filing spouse owns or has signature authority on an account that the filing spouse is not required to report, then both spouses must file separate FBARs. The requirement to prepare and retain the Form 114a authorization is not well known. Treasury's Instructions to Forms 114 and 114a specifically state that if a spouse files a joint FBAR, the non-filing spouse must formally designate the filing spouse as his or her “third party preparer” by signing and retaining the Form 114a authorization (duly executed by both spouses). The better practice is for each spouse to file separate FBARs, which avoids the risk that the IRS might later determine that either spouse failed to meet the FBAR requirements. Failure to File by the Trustee, Grantor or Beneficiary of a Trust Several rules related to US and foreign trusts cause confusion. First, as noted above, a US trust that maintains foreign financial account(s) with a maximum aggregate balance in excess of US$10,000 must file an FBAR. This reporting obligation applies even if the trust is treated as a disregarded entity for US federal income tax purposes (such as a US grantor trust). Second, any US person who has signature or other authority over a US or foreign trust's foreign financial account(s) (e.g., a US trustee) is also required to file an FBAR in his or her capacity as a signatory on the account (source: 31 CFR § 1010.350(f) - FBAR filing requirements for US persons with signature or other authority). In addition to the basic requirements noted above, a US person who (i) is the trust grantor and (ii) has an ownership interest in the trust for US federal tax purposes (The determination of whether the trust grantor has an ownership interest in the trust is made under Internal Revenue Code §§ 671-679) is treated as the owner of the trust's foreign financial account(s) for FBAR reporting purposes and must file an FBAR reporting the trust's foreign bank accounts (source: 31 CFR § 1010.350(e)(iii)). This is a personal filing obligation and is in addition to the trust's filing obligations. The rules for a trust beneficiary are slightly different. A US person who is the beneficiary of a foreign or US trust is treated as the owner of the trust's foreign financial accounts for FBAR reporting purposes and is required to file an FBAR reporting the trust's foreign bank accounts if the person has a greater than 50% present beneficiary interest in the assets or income of the trust for the calendar year (source: 31 CFR § 1010.350(e)(iii)). However, under the regulations, such a beneficiary may avoid FBAR reporting if the trust, trustee, or agent of the trust is a US person who files an FBAR disclosing the trust's foreign financial account(s) (source: 31 CFR § 1010.350(g)(5)). This limited exception only applies to beneficiaries and does not apply to grantors or trustees. When in doubt, the beneficiary should file an FBAR reporting the trust's account(s) to avoid the risk of substantial penalties. Failure to File an Individual Report by the Majority Owner of a Business Entity A US person who owns, directly or indirectly, “(i) more than 50% of the total value of shares of stock or (ii) more than 50% of the voting power of all shares of stock” of a US or foreign corporation is treated as the owner of the corporation's foreign financial accounts for FBAR reporting purposes and is required to file an FBAR on his or her own behalf reporting the corporation's foreign financial accounts (source: 31 CFR § 1010.350(e)(2)(ii)). The rules apply similarly to a majority partner in a partnership or majority owner of any other entity. A US person who owns, directly or indirectly, “(i) an interest in more than 50% of the partnership's profits (e.g., distributive share of partnership income taking into account any special allocation agreement) or (ii) an interest in more than 50% of the partnership capital” is treated as the owner of the partnership's foreign financial account(s) for FBAR reporting purposes and is required to file an FBAR on his or her own behalf reporting the partnership's foreign bank accounts.25 FBAR reporting is also required regarding the foreign financial accounts of any other entity (including a disregarded entity for tax purposes) in which a US person owns, directly or indirectly, more than 50% of the voting power, total value of equity interest or assets, or interest in profits.26 Significantly, these personal filing obligations are separate from any obligation that the business entity in which the person holds a majority interest may have. Accordingly, if the corporation, partnership or other entity is a US person, then the entity itself may also be required to file an FBAR. If either the entity or signatory files an FBAR, such a filing does not relieve the majority owner of his or her personal FBAR filing obligations. Again, the US$10,000 reporting threshold is determined on an aggregate basis by adding the highest reported balance of every foreign account in which the US person has a financial interest — or over which he or she has signature or other authority — during the calendar year (including financial accounts held in the name of an entity or nominee), and is not determined on an account-by-account basis. For example, the controlling shareholder of a corporation with a foreign corporate account holding a high balance of $6,000 USD who also maintained a personal foreign financial account with a high balance of $6,000 USD is required to file an FBAR and report both accounts because the aggregate value of his foreign financial accounts exceeds $10,000 USD. Failure to File by Minor Children Minor children who are US citizens or residents must file FBARs if they are the owners or signatories of foreign financial account(s) that meet the $10,000 USD aggregate threshold. All the same filing requirements discussed above (including, but not limited to, beneficial ownership and trusts) apply equally in the case of a minor child. The FBAR instructions explain: “Generally, a child is responsible for filing his or her own FBAR. If a child cannot file his or her own FBAR for any reason, such as age, the child's parent, guardian or other legally responsible person must file it for the child.” Failure to Comply with Bank Secrecy Act ("BSA") Record Retention Requirements In addition to filing an FBAR, a US person who falls within the FBAR filing requirements is also obligated to maintain certain information and records relating to foreign financial accounts for five years (source: 31 CFR § 1010.420). The records which must be retained include the following: (1) the name of the accountholder; (2) the account number; (3) the name and address of the financial institution; (4) the type of account; and (5) the maximum value of each account during the reporting period.38 A complete and accurate FBAR (that includes all of the above information) will satisfy these record retention requirements. Nevertheless, the better practice is to retain complete copies of bank statements for all foreign financial accounts to support the FBAR for at least six years from the due date of the FBAR, which is the limitations period (source: see 31 U.S.C. § 5321(b) (six-year statute of limitations; see also Internal Revenue Manual § 18.104.22.168.8). The penalties for failing to maintain adequate foreign account records are the same as those for failing to file a timely and accurate FBAR (source: 31 U.S.C. § 5321(a)(5)(C)). For a deeper understanding of FBAR violations outside of the Offshore Voluntary Disclosure Initiative ("OVDI" also called the "OVDP") check out this related blog post.