Taxes for Expats: The Key FBAR Requirements You Need to Know About
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In today’s global economy, it’s common for U.S. taxpayers to have bank accounts, investments, pensions, etc. outside of the United States. As an expat, you may not be aware of all the tax requirements, including the rules for FinCEN or FBAR.
If you keep money in a foreign account, you have to file a form called FinCEN 114, also known as FBAR. Not complying with these tax regulations can lead to heavy penalties.
Whether you need to file FBAR or not depends on how much you make each calendar year. If you want to know more about FBAR filing, we can help!
Here’s what you need to know about the FBAR requirements.
Foreign Bank Account Report
Generally, when a U.S. expat moves out of the country, they secure a bank account. FBAR stands for Foreign Bank Account Report. This is also called FinCEN form 114.
As an American abroad, if you have a foreign bank account, you may be required to complete this form. This is especially true if you have a large sum of money in a foreign account.
You are not taxed on your foreign account because of this form. Instead, FBAR simply provides information about your financial holdings to the U.S. government.
The original intent of the FBAR filing requirement in 1070 was to deter money laundering. As the U.S. debt and deficit have increased over the years, the U.S. government has become more tenacious about FBAR filings.
The goal is to detect and prevent those holding money abroad from dodging taxes.
Do You Need to File an FBAR?
If you’re an American abroad with a foreign bank and financial accounts, it’s important to check your bank statements regularly. Consistent tracking of your accounts is a good idea.
The amount of money you’re holding in your accounts determines whether you need to file. The minimum threshold for filing an FBAR is over $10,000 in combined income from your foreign bank accounts at any point during the year.
To determine if you meet the threshold, you must convert foreign currency to U.S. currency. The rules for FBAR filing are specific.
If you have over $10,000 in a foreign bank account for even 1 day, you are required to file.
What Do You Not Need to Report?
In the taxation world, there are always a few exemptions. Some U.S. citizens living abroad don’t need to file an FBAR. This is based on the types of foreign accounts they hold.
Examples of these exemptions include:
- A government-owned account
- International financial institutions
- Accounts maintained by the U.S. military
If you hold money at a U.S. military bank in a foreign country, you do not need to report it. The government considers military banks to be domestic U.S. banks.
You are not required to report accounts at banks in the U.S. territories of Puerto Rico, Guam, or the U.S. Virgin Islands. You do not need to report a U.S.-based account associated with a foreign bank.
If you have questions about FBAR or are ready to file, consult a tax expert for help.
Filing the FBAR
FBAR for U.S. expats isn’t managed by the IRS. The Financial Crimes Enforcement Network (FinCEN) oversees FBAR and is part of the U.S. Department of Treasury.
To file FBAR, you must first complete Form 114. FBAR can be a bit overwhelming if you don’t have previous experience with the report.
A tax professional can offer guidance and help ensure you meet all FBAR filing requirements.
Foreign Bank and Financial Accounts Reporting
There are a variety of accounts that you must report on FBAR. They only need to be reported if they meet the $10,000 filing requirement. These include:
- Checking accounts
- Savings accounts
- Retirement funds
- Pension accounts
- Investment accounts
- Mutual funds
- Debit cards
- Prepaid credit cards
- Securities and brokerage accounts
- Life insurance and annuities with cash value
Reporting Your Foreign Bank Accounts
You are required to list every foreign financial account you have or those you have signature authority over using FinCEN 114. The form asks for information on all foreign accounts held outside of the U.S.
This includes the name of your financial institution, account number, and account balance. FBAR is for each account holder. Married couples should either file separately or file a single joint report.
If you and your spouse own a joint account and neither of you or only one of you owns a separate financial account, you can file one report. Otherwise, you should file individually.
If the account has multiple holders or persons with signature authority, there may be multiple FBAR reports needed.
FBAR for American expats can be daunting. Save yourself the worries and headaches and enlist the help of a tax professional to guide you through FBAR requirements.
To keep tax regulations consistent, the deadline for FBAR filing is April 15th each year. If you miss the filing date, Americans living overseas have an extension to file until October 15th.
The extension is automatic. Extensions longer than six months are rarely granted.
The FBAR isn’t filed with your federal tax return. It’s filed separately with FinCEN.
It’s important to remember that even if you do not need to file a U.S. tax return, you may be required to file an FBAR.
What can you do if you miss the deadline? Currently, the IRS is conducting voluntary disclosure for those who need to file foreign bank account reports late. Individuals who report previously unreported foreign income are also eligible for voluntary disclosure.
How Is FBAR Related to Your Tax Return?
A FBAR isn’t a tax form. It’s not submitted to the IRS.
However, certain information relating to your foreign bank accounts may be required on your tax return. The income you earn from your foreign financial accounts is included in your tax return from the year you earned it.
You report foreign income based on the type of income you earn. For example, you report dividends and interest on Schedule B and capital gains on Schedule D.
You will check Part III Line 7a on Schedule B to report dividends or interest you earned in foreign accounts. In certain cases, you may need to file Form 8938 with your tax return. This is a Statement of Foreign Financial Assets.
This is separate from FBAR, although it contains similar information. You will use Form 8938 to report foreign financial account balances of $50,000 on the last day of the year or $75,000 at any point during the year.
FBAR Penalties for U.S. Expats
If you forget about FBAR or are unaware of the requirements, you may have to pay a fine. Unfortunately, these fines are steep. You could have to pay up to $10,000 for an FBAR violation.
If you try to avoid filing, the fines can increase dramatically. These could be as high as $100,000 or 50% of your account balance at the time of the violation.
If you receive a criminal penalty, you could be fined $250,000 plus five years in prison. And that’s not all.
If you violate FBAR requirements and another law, the fine could be as high as $500,000 and 10 years in prison. If you live abroad, forgetting about or avoiding filing can be a costly mistake.
The IRS and FBAR
You may wonder how the IRS knows whether or not you file an FBAR. If you sign up for a foreign bank account as an American expat, you have to sign certain forms as a U.S. citizen.
These forms require a social security number. This allow the IRS access to your account information. U.S. financial authorities can see details regarding your foreign bank account.
They can access your financial records and determine whether you filed an FBAR and if you are required to do so.
Where Do You File an FBAR?
You can e-file FBAR on your own through FinCEN’s online filing system. Although you can try to handle the process alone, it’s important to meet all the FBAR requirements.
For this reason, it’s a good idea to have the guidance of a tax accountant or other tax professional to help you with the process.
Understanding FBAR Requirements
Understanding FBAR requirements is no easy task. You may be unsure whether you need to file FBAR and how to go about it.
There are steep penalties for avoiding these requirements, so it’s important to get the right information and help with the process. Luckily, there are tax experts who can take this burden off your shoulders and help you along the way.
At International Tax consultants, our tax attorneys and accountants have extensive knowledge of international tax laws. We put our clients first and are here to assist you with any international tax needs you may have.
Contact International Tax Consultants today to schedule a consultation.