FBARS – THE BASICS

The FBAR Filing Requirement

With certain limited exceptions, U.S. taxpayers with ownership or signature authority over one or more foreign bank and investment accounts containing at least $10,000 (in cash or assets) in the aggregate on one or more days during the calendar year must file an FBAR (Report of foreign bank and financial accounts), FINCIN Form 114.1 This obligation is separate from your obligation to file an income tax return.

Taxpayers with an ownership interest or signature authority over foreign financial accounts (bank and brokerage accounts, corporate, trust and other entity accounts, certain retirement plans and life insurance with a cash value) are required to file an annual Foreign Bank and Financial Account Reports (FBARS) on-line with FinCEN.  Starting with the 2016 FBAR, the due date is the due date of the 2016 income tax return, with regard to extensions.  Both current and delinquent FBARs must be filed on-line. 

For example, assume on January 1 a U.S. taxpayer has $9,001 in one foreign bank account, $525 in another foreign bank account and $600 in a foreign brokerage account for a total of $10,126.   On January 2, taxpayer transfers $200 to his U.S. bank account and makes no other deposits in the foreign accounts (and assume there is no income in those accounts) for the remainder of the year.  Although for 364 days, the total sum in the foreign accounts is less than $10,000, taxpayer still has an FBAR obligation because during the calendar year, there was more than $10,000 on January 1st.  Taxpayer is required to file an FBAR reporting all foreign accounts by the due date for the Form 1040, April 15th of the following year; however, if a valid and timely extension is filed for the Form 1040, the due date for the FBAR is also extended until October 15th.

To determine the value of a foreign account during the year, the highest value of the account in the foreign currency during the year is multiplied by the U.S. dollar exchange rate at the end of the year, using the U.S. Treasury Rates.  If the rate is not available, then use any recognized exchange rate service.

Penalties

The maximum fine for a non-willful failure to timely file an FBAR is $10,000 and there is a six-year statute of limitations for assessment of the penalty (thus, there can be $60,000 in penalties, one for each delinquency).  The penalty may be reduced or eliminated upon a showing of “reasonable cause,” which means, basically, that taxpayers were not negligent in their failure to comply. Note:  Meeting the reasonable cause standard is a high hurdle to clear and merely forgetting to file the FBAR or lack of knowledge about the FBAR filing requirement does not meet the reasonable cause standard. Currently, there are several IRS amnesty programs available to taxpayers who voluntarily file delinquent FBARS, but it is strongly advised to hire an experienced tax professional with expertise in this area; otherwise, you could wind up with large penalties.

For willful violations, the penalty can be as high as 50% of the highest amount in the accounts during the past six years or $129,210 (increased for inflation), whichever is greater, and IRS has a string of recent federal court victories upholding the imposition of willfulness penalties.  Willfulness includes objectively reckless behavior in addition to intentional conduct.  In a recent case, Horowitz,No. 19-1280 (4th Cir. 10/20/20), the court of appeals upheld a willfulness penalty where taxpayers failed to disclose to their accountants the existence of foreign accounts and checked the box “no” on Schedule B, Part III (that asks whether you have foreign accounts).  Note:  Checking the box “No” when you have foreign accounts generally negates a reasonable cause argument because you are stating under penalties of perjury that you do not have foreign accounts,2 which is a false statement of fact.

Conclusion

If you have failed to timely file an FBAR, get expert tax advice before proceeding, since there are techniques to minimize or eliminate your potential exposure to penalties.  If you just send in a delinquent FBAR, using one of the excuses on the form, you can expect an automatic penalty and an uphill battle to reduce it, as well as a costly and stressful endeavor to boot.

  1. FinCEN means Financial Crimes Enforcement Center and is part of the U.S. Treasury. the year, using the U.S. Treasury Rates. If the rate is not available, then use any recognized exchange rate service.
  2. Above your signature line on Form 1040, it reads, “Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete.” This statement applies to Schedule B, Part III where it asks if you have any foreign accounts.