Citizens banking outside of US may need to file report

By Andrew R. Culliver, Legal Intern, Staff Judge AdvocateAugust 26, 2016

usa image
(Photo Credit: U.S. Army) VIEW ORIGINAL

VICENZA, Italy -- Working and living on an overseas installation presents an entirely new realm of financial responsibilities. For those who choose to keep money in Italian or other foreign banks, you may need to file a Report of Foreign Bank and Financial Accounts, commonly referred to as an FBAR.

What is the FBAR?

Authorized by the Department of Treasury and enforced by the Internal Revenue Service, the FBAR is not a tax. Instead, the FBAR is a tool used by the federal government to identify persons who may be using foreign financial accounts and services to circumvent income tax reporting. Therefore, if you accurately report your earnings annually, the FBAR is nothing to fear.

As a general rule, the FBAR reporting obligation applies to those satisfying all of the following conditions:

1. A U.S. person,

2. with a financial interest in, or signature authority over,

3. any financial account(s) outside of the United States,

4. with an aggregate value exceeding $10,000, at any time during the calendar year.

The language in this rule is actually quite dense, so unpacking the meaning of each term is essential to understanding your potential FBAR reporting status.

As you read through this article, note that an affirmative answer to each and every one of the individual requirements means that you should file a FBAR. However, a negative response to any one requirement means that you need not report.

Step One: U.S. Personhood

The first step is determining whether you qualify as a "U.S. person."

For a majority of Vicenza military community personnel, U.S. citizenship will make you a "U.S. person." Resident-aliens living in the U.S. (an anomaly in the Vicenza Military Community) are also included.

Additionally, if you have interest in or own entities organized or created under U.S. laws, such as corporations, partnerships, limited liability companies, and trusts or estates, you should assume that these qualify as "U.S. persons."

Step Two: Foreign Financial Account

Next, you are probably asking, "What qualifies as a 'foreign financial account?'"

"Foreign" means the account is physically located outside of the United States and its territories. The key here is the physical location of the bank. "Foreign" would include local branches of Italian banks like BNL, because they are in Italy (both on- and off-base locations). However, your account held at the on-base U.S. financial institution, namely Community Bank and Global Federal Credit Union, are exempted.

A "financial account" can be more than just a bank account. In addition to a bank account, it includes a securities or brokerage account, commodity futures/options accounts, cash value insurance policies, mutual funds, or any other account with a financial institution or person performing financial services.

Step Three: 'With financial interest in, or signatory authority over'

Step three requires that you ascertain your financial interest in each specific account. There are two prongs to step three -- (1) a financial interest in, or (2) signatory authority over -- a foreign financial account. If you fall into either one of these categories, the account could qualify for the reporting requirement.

Determination in this stage is simple. If you are a legal account holder, you always satisfy this requirement. If you are an agent, nominee, or attorney acting for a person who meets this requirement, you qualify as well.

Additionally, if you are the holder of more than 50 percent of a corporation's stock, voting power, or a partnerships profit percentage/capital, you qualify.

Lastly, if you have signatory authority over a foreign financial account, you still qualify. For example, if John has power of attorney on his elderly parents' extensive Swiss bank accounts, he meets this step, even if he has never exercised the power of attorney.

Step Four: The $10,000 Threshold

The chief FBAR requirement is the one that will likely eliminate most people. It is the easiest to understand, but perhaps the most difficult to calculate.

If you have had, at any time during the calendar year, $10,001 or more in the aggregate of your foreign financial accounts, you must report, assuming you have met all other steps. There are two key matters to note with this requirement. First, calculations are an aggregate, so if you have $5,000 in account A, and $5,001 in account B, you qualify and may need to report. Second, the aggregate is calculated only from your qualifying foreign financial accounts. If you have $1,000 in a qualifying foreign account, and $100,000 in a U.S. bank account in Florida, you do not qualify and will not need to report.

For those of you with several accounts, or poor bookkeeping skills, calculating this figure could prove to be a difficult task. Fear not, the requirement is for a reasonable approximation, not an exact cent total.

Remember, the requirement is measured in U.S. dollars, so accounts held in foreign currency must be converted to dollars, using U.S. Treasury reporting Rates of Exchange from the last day of the calendar year. If this rate is unavailable, you may use a verifiable exchange rate, provided that you state the source in your report.

Penalties

If you have assets in foreign accounts and are still unsure whether you need to file a FBAR, consider seeking legal assistance regarding your potential obligation. Why? Because the consequences could be steep.

Failure to file a FBAR could result in potential civil and/or criminal sanctions. For a negligent violation, a fine of up to $500 could be levied. Where a pattern of negligence is found, a steeper fine of up to $50,000 could result.

Criminal liability may result from the willful failure to report. These penalties include extensive fines, and up to 10 years of incarceration. Civil penalties may be levied as well, ranging from six figures to as much as 50 percent of the total of unreported funds.

Delinquent FBAR Submission

If you realize that you have failed to file a past FBAR, the IRS has procedures in place to remedy your mistake. Under Delinquent FBAR Submission Procedures, "[t]he IRS will not impose a penalty for the failure to file the delinquent FBARs if you properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted." A statement explaining your late filing should be included in your submission.

Though there are available methods of reobtaining healthy reporting status, the prudent approach is to maintain good standing.

Remaining FAQs

There are a few notable concerns that frequently come up in FBAR reporting inquiries. First, if your spouse has filed a FBAR report for your jointly held account, you need not file.

Second, for purposes of the FBAR, keep your financial records for a minimum of five years from the report due date.

Lastly, the FBAR is free to file and imposes no tax consequence on the individual filing the report. So don't be fearful of it, and err on the side of caution, where possible.

Additional Information

The 2016 filing deadline for FBARs was June 30. However, make note that the date has been moved forward to April 15 for 2017.

For more information on the FBAR, visit, https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar.