Common Mishaps with Calculating the $10,000 FBAR Threshold

Sep 08, 2017

In general, an FBAR reporting obligation applies to each “United States person” who has a financial interest in, or signature or other authority over, foreign financial accounts that have an aggregate value exceeding $10,000 at any time during the calendar year. This post will clarify the particulars of just how the $10,000 threshold is calculated, so that you can avoid common pitfalls. As a side note, the FBAR Wiz app lets you quickly and anonously determine if you have an obligation to report foreign assets or accounts for free. FBAR reporting is required if the aggregate value of the US person's foreign financial accounts exceeds US$10,000 at any time during the calendar year. There are three common misconceptions about this $10,000 USD filing threshold: First Misconception: The $10,000 USD reporting threshold is determined on an account-by-account basis. Applicable Rule: The reporting threshold is determined on an aggregate basis by adding the highest reported balance of every foreign account that the US person owned or over which he had signature authority during the calendar year. Thus, signature authority over a corporate account with a “high balance” of US$6,000 and maintenance of a personal account with a “high balance” of US$6,000 requires filing an FBAR reporting both accounts because the aggregate value of the accounts exceeds $10,000 USD. Second Misconception: An account with a balance under $10,000 USD does not need to be reported on an FBAR. Applicable Rule: A person required to file an FBAR must report all of his or her foreign financial accounts, including any accounts with balances under $10,000 USD (as discussed above). Likewise, if the reporting obligation is triggered because a person has mere signature authority over corporate accounts with a maximum aggregate balance of more than $10,000 USD, all personally maintained foreign accounts must also be reported, regardless of size. Third Misconception: The filing obligation is triggered only if the maximum aggregate balance exceeds $10,000 USD at year-end. Applicable Rule: The reporting obligation is triggered if the maximum aggregate balance exceeds $10,000 USD at any time during the calendar year. The regulations permit an accountholder to rely on the balance reported in a periodic (i.e., monthly) statement, as long as the statement “fairly reflects” the maximum account balance during the year. For example, if large amounts were deposited and withdrawn in a single month that substantially reduced the reported value at month-end, then, depending on the circumstances, the accountholder may not reasonably rely on the month-end statement when determining the maximum account balance. For an account holding foreign currency, the FBAR instructions provide that an accountholder should convert the monthly foreign currency balance to US dollars using the Treasury's Financial Management Service rate (select Exchange Rates under Reference & Guidance at www.fms.treas.gov) for the last day of the calendar year. Notably, the FBAR filing thresholds and other requirements for reporting foreign assets are different from those applicable to filing IRS Form 8938, Statement of Specified Foreign Financial Assets. Form 8938 is filed annually with a US Federal Income Tax Return (Form 1040) and requires information reporting on a variety of “specified foreign financial assets,” as defined therein. For example, financial accounts held at a foreign branch of a US financial institution must be reported on an FBAR but need not be reported on Form 8938. Oddly enough, the most common FBAR reporting mistake is simply failing to file. Some US persons continue to deliberately conceal assets in secret offshore bank accounts in the hope of evading US tax authorities. In many other cases, however, Americans living and working outside the US, recent immigrants, foreign citizens who are resident in the US, and US children who received gifts or bequests from their foreign parents are simply unaware of their FBAR filing obligations. Despite well publicized enforcement actions against financial institutions and individual accountholders, as well as corresponding amnesty programs, many US persons with foreign financial accounts remain unaware of the FBAR reporting obligations. US persons with ownership or signature authority over foreign financial accounts should obtain complete copies of their account records and fully educate themselves regarding FBAR reporting obligations and, when necessary, seek advice from US tax professionals in advance of the June 30th filing deadline. Those who fail to resolve prior reporting errors can expect harsh treatment from US tax authorities and remain exposed to substantial penalties and possible criminal prosecution. Similarly, US courts have not been sympathetic to uninformed foreign accountholders who failed (deliberately or otherwise) to investigate their reporting obligations. In some cases, US courts have imposed a penalty equal to 50 percent of the highest account balance for each year that remained open under the statute of limitations. Many who deliberately concealed offshore bank accounts have been prosecuted and received prison terms. You cn avoid the same pitfalls by checking out the free FBAR Wiz app to determine if you have an obligation to report offshore assets or offshore accounts to the IRS - know your obligations and know your rights! For an easy to understand summary of the IRS' Offshore Voluntary Disclosure Program, check out this related blog post.