FBAR Tips for Indian Expats Living in the US (Including NRE Account Treatment)
Sep 17, 2017
In this post, the FBAR Wiz explores some helpful tips for Indian expats living in the United States. As the US cracks down on foreign bank and financial accounts, it only means one thing for Indian Americans: increased reporting obligations! If you thought you were done with this year's reporting when you filed your tax returns in April, you probably forgot about the FBAR - Foreign Bank and Financial Account Report. The FBAR Form is a report to be filed in addition to your tax return. Indian NRE accounts are counted as a type of asset that must be reported on the FBAR. 1. FBAR is Different From a 'Normal' (i.e., Form 1040) Tax Return The FBAR is filed in addition to your income tax return. The FBAR must be filed in Form TD F 90-22.1 even if you have already filed Form 8938, 'Statement of Specified Foreign Financial Assets' along with the tax return. The historical roots of the FBAR are found in the Bank Secrecy Act of 1970 and the intention then was only to collect information on foreign bank accounts. Only recently the US Treasury handed over administration of the FBAR to the IRS which in turn started linking the FBAR to the tax return to check tax evasion. While Form 8938 and the FBAR require more or less the similar kinds of details, there are some differences in thresholds and type of assets. You can get a complete comparison here. 2. Even If There's No Income, You May Still Have to Report on the FBAR If you hold a foreign financial account, you may have a reporting obligation even though the account produces no taxable income. Check out this related blog post covering the FBAR requirements in greater detail. 4. Even a single day's high balance counts The FBAR must be filed by US residents, green card holders and citizens if the aggregate of their bank and financial accounts exceeded $10,000 at any time during 2011. This means that if the aggregate of your accounts exceeded $10,000 even on a single day in 2011, you would have to file the FBAR and disclose all the individual accounts. "Sometimes it may seem like you have to report more assets than you actually have, especially when you transfer funds between accounts. Make the appropriate reporting and don't worry too much because there are no real tax implications from the FBAR if you have reported income from these assets on your tax return," Navani adds. The FBAR regulations say that you must have either signature authority or financial interest in these accounts. We'll discuss these two in the following points. 5. What Does Signature Authority Mean? You must either have a signature authority OR financial interest in the foreign bank or financial account, for that account to qualify as 'your' account under FBAR. The important thing to remember is that it is either signature authority or financial interest. You may have signature authority on an account with no financial interest. For instance, a CFO of a company may have signature authority over the company's bank account. If a US company has a foreign bank account and the US CFO is the only person who is an authorized signatory, then both the company will file an FBAR (signed by a corporate officer - maybe the CFO). In addition, the CFO will file a personal FBAR and report the account as one which he or she doesn't have a financial interest in but does have signature authority. There are some exceptions. Individuals who have signature authority over, but no financial interest in, a foreign financial account are not required to report the account in certain situations. Employees of publically traded companies who only have signature authority over foreign bank accounts are usually exempt from FBAR. You can read the complete list of exceptions in the instructions to the FBAR, available here. 6. The Term "Financial Interest" You must file the FBAR even if you have financial interest without signature authority. "An important example here would be if a US person owns more than 50% of an Indian Pvt. Ltd., then he or she must file an FBAR since he or she has a financial interest in the bank accounts maintained by the Indian Pvt. Ltd," Navani explains. Broadly, you are deemed to have financial interest if you are the owner of record or holder of title in an asset, corporation, trust or other similar structure. This interest can be direct or indirect, such as through an agent or power of attorney. A complete definition of 'financial interest' is available in the instructions to the FBAR. 7. Understanding the Treatment of Joint Accounts, Power of Attorney Accounts, and Other Complexities There can be several possibilities when it comes to account holding. You could either be a single owner or joint owner. The person with whom you hold a joint account (spouse, parents) may be a US person or a non US person. In case you hold a joint foreign account with your parents who are in India, then you must file the FBAR if all other conditions are met. In case of filing FBAR with the spouse, there could be several scenarios. If you are a US person and your spouse is a non US person, you need to file your FBAR but your spouse need not. If both, you and your spouse are US persons, there is a certain exception. The spouse of an individual who files an FBAR is not required to file a separate FBAR if the following 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; and (3) both spouses sign the FBAR in Item 44. See Explanations for Specific Items, Part III, Items 25-33. Otherwise, both spouses are required to file separate FBARs, and each spouse must report the entire value of the jointly owned accounts. A nominee, attorney, or agent of an individual holding a foreign account also has a filing responsibility. So if you hold the power of attorney over a foreign account, you must file your FBAR. Suppose you hold an account in India and your father holds the power of attorney for that account, in such cases too, you must file your FBAR. 8. Treatment of Financial Accounts Like Hedge funds, PE funds, Mutual Funds, Provident Funds, etc. The definition of foreign bank and financial account includes a host of accounts, apart from the bank account. This includes: 1. Savings account, bank fixed deposit account 2. Brokerage and securities account 3. Commodity futures or options account 4. Insurance policy with cash surrender value 5. Annuities cash value 6. Mutual funds In the case of brokerage account, commodities account and mutual funds, the market value of your securities must be taken. In the case of an insurance policy like an endowment policy, the cash surrender value would be taken into account. The insurance company will be able to help you arrive at the value. In the case of an annuity, again, the cash value would have to be taken. In case of provident funds, Navani advices, "Report it on the FBAR but indicate on line 16 that it is an 'other account' and write in 'retirement'." If the aggregate of all these balances exceeds USD 10000 during the year, you would need to file the FBAR. For exchange rate conversion, you would need to use the Treasury's Financial Management Service rate (this rate may be found at www.fms.treas.gov) from the last day of the calendar year. If no Treasury Financial Management Service rate is available, use another verifiable exchange rate and provide the source of that rate. 9. The Ominous Failure-to-File FBAR Penalties Willful failures can be subject to civil penalties of up to the greater of USD 100,000 or 50% of the account balance and/or criminal penalty of up to USD 250,000 and/ or five years imprisonment. This penalty can be applied for each year an FBAR is willfully not filed. The IRS can also go back 6 years and check your tax returns to trace the balances reflecting in the FBAR. Non-willful failures can be subject to a penalty of $10,000 USD per year for each year an FBAR is not filed, also going back six years. This penalty can be waived if reasonable cause is shown for the failure to file. 10. Forgot to answer relevant question on Form 1040? Schedule B of your income tax return, form 1040, asks: "At any time during 2011, did you have a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country? If 'Yes,' are you required to file Form TD F 90-22.1 to report that financial interest or signature authority?" You may have answered this question as a 'No' at the time of filing your tax return but realize now that you indeed have foreign financial accounts that require an FBAR filing. If it is an isolated, inadvertent error of not checking the box 'yes', but the income was reported, consider amending Form 1040, Sch. B to answer the question correctly. If the incorrect answer is related to more substantial under reporting of income, you may want to consult a tax professional to discuss your options. 11. Additional Forms That You May Need to Report Foreign Assets and/or Foreign Accounts to the IRS Form 5471 – This form is required in many circumstances where a “U.S. Person” has an interest in a “foreign” (non-U.S.) corporation. The Specific reporting requirements are found in Internal Revenue Code Sections 6038 and 6046. (Pay special attention to the 6038 regulations.) In general, the reporting requirements are for the purpose of identifying “U.S. Persons” who: – own at least 10% of a “non-U.S.” “controlled corporation”; which – is earning certain kinds (including passive) of income; that – is not subject to direct taxation by the U.S. Government. The goal is to attribute the income of the “non-U.S. corporation” directly to the individual U.S. shareholder. This is referred to as the “Subpart F Income Regime” which begins with Internal Revenue Code Section 951. The reporting requirements exist irrespective of whether one is otherwise required to file a U.S. tax return. (One might be required to file an income tax return (1040 or 1040NR) for the sole purpose of filing Form 5471.) Are you the owner of a “foreign corporation”? Watch out for the attribution rules (you are deemed to own the shares) and for the possibility of “indirect ownership” (you own something that owns the corporation). Just a “heads up”. Watch out for the “attribution rules” in Internal Revenue Code S. 318. You may own more shares of that “foreign corporation” than you think you own! A form required ONLY if you are otherwise required to file a tax return – Form 8938. Form 8938 is a key component of the FATCA legislation. It is mandated by Internal Revenue Code section 6038D. You are NOT required to file Form 8398 unless you are otherwise required to file a tax return. As of the date of the writing of this post (warning!! warning!! warning!!) the IRS explains that: If you do not have to file an income tax return for the tax year, you do not need to file Form 8938, even if the value of your specified foreign assets is more than the appropriate reporting threshold. 12. Reporting Early with Form 3520A When a Form may have to be filed before the tax return is due – Form 3520A. Form 3520A is the information return required for a “foreign trust”. Forms 3520 and 3520A appear to be required whether a tax return is otherwise required. Interestingly, Form 3520A is required by March 15 of each year (before the due date of the tax return!). Form 3520 is a key component of the the collection of International Information returns. The first step to understanding your offshore disclosure obligations is to check out the free FBAR Wiz app to quickly and anonymously determine what foreign assets and/or foreign accounts that you might be obligated to report to the IRS.