Friday, February 6, 2015

FinCen Form 114: Exactly Who Must File One And The Common Misconceptions



Under the Bank Secrecy Act, the U.S. Government requires U.S. taxpayers with financial accounts abroad, to report the existence and certain details of such accounts.

This may include where the accounts are held, the amounts that are kept, income generated and any asset appreciation that has been realized.

One of the most prevalent of these federal reporting requirements is called the Financial Bank and Account Report (FBAR), formally known as the FinCen Form 114.

According to the IRS:

“If you have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, exceeding certain thresholds, the Bank Secrecy Act may require you to report the account yearly to the Department of Treasury by electronically filing a Financial Crimes Enforcement Network (FinCEN) 114, Report of Foreign Bank and Financial Accounts (FBAR).” – IRS: Report of Financial Bank and Account

In this article, we will break down key definitions that remain a source of confusion, in an effort to clarify the common misconceptions associated with the Financial Bank and Account Report; misconceptions that can likely lead to significant monetary penalties and prolonged frustration for U.S. taxpayers (as individuals and corporate entities).

Note: The terms “FinCen Form 114” and “FBAR” will be used interchangeably throughout this article.

U.S. Persons and Entities – Defined By The IRS

In order to accurately assess reporting obligations, it’s important to understand whom the IRS intends to hold accountable to the FinCen 114 reporting requirement.

For instance, according to the IRS, a “U.S. Person” is a: U.S. citizen, alien resident; and entity such as corporations, partnership, LLC, trust or estate -- all formed under U.S. law.

These are all considered to be “U.S. Persons” by the IRS; and are all potentially required to report their foreign financial accounts.

Other Key Terms And Definitions

Based on what the IRS has listed, a foreign financial account is a bank account (checking, saving, demand deposit and time deposit), brokerage account, mutual fund, or “other” financial accounts like commodity and futures accounts, pooled funds, certain insurance policies and annuities.

Note: These financial accounts do not need to produce income in order to be reportable.

Having signature authority over a financial account refers to the individual’s authority to disposition the money, funds, or assets held in a financial account by written instruction or verbally to the account contact.

Note: Entities cannot establish signature authority over a financial account.

A U.S. person has a financial interest depending on exactly how the account is held.

For instance, if the financial account is held by an agent or nominee; or a corporation where the U.S. person owns 50% or more of the voting power or the total value of share; by trust, if the U.S. person is the trust grantor and has an ownership interest in the trust for U.S. tax purpose, financial interest is established.

These are only a couple of examples.

For a complete list, see the Chapter 24, Section 16, 4.26.16.3.4 of the Internal Revenue Services Manual.

Hypothetical Example Of When An FBAR Is Necessary And When It Isn’t

U.S. taxpayers with international financial interests in the amount of $10,000 or more of aggregate value are required to report directly to the Department of Treasury.

Taxpayers report this financial account to the US Treasury electronically by filing the FinCen Form 114 – Financial Bank and Account Report (FBAR).

This means if a U.S. person has a bank account in Switzerland with a balance of $5,000 and another financial account in Belize with a balance of $5,000, the FBAR must be filled out and sent in to the U.S. Treasury by June 30.

If that same person had only one account in Switzerland with a balance of $10,000 an FBAR would be required.

On the contrary, if that person decided to open an account with a balance of $5,000 an FBAR would not need to be required -- assuming the account balance never exceeded the $10,000 threshold at any time within the existing year.

Keep in mind that the foreign financial account, in this example is a bank, but it also could also include some of the other forms of financial accounts listed above e.g. brokerage accounts or mutual funds.

The FBAR: 6 Common (And Costly) Misconceptions

Misconception #1: The deadline is April 15th (the same as the tax deadline).
Fact: The deadline is June 30th for every year the account was open and exceeded $10,000 at any point throughout the year.

Misconception #2: An extension can be filed if necessary.
Fact: There is no extension for the FBAR.

Misconception #3: The form is sent in to the IRS.
Fact: The form is sent to the Department of Treasury.

Misconception #4: The $10,000 threshold applies to individual financial accounts.
Fact: The $10,000 threshold applies to the aggregate total of financial accounts held offshore.

Misconception #5: It is illegal to place more than $10,000 in foreign financial accounts.
Fact: It is perfectly legal to appropriate more than $10,000 in foreign financial accounts. It is illegal not to report it when it is deemed reportable.

Misconception #6: The FBAR form can be mailed in.
Fact: The form can only be sent in electronically through FinCen’s BSA E-Filing System.

Neglecting to understanding how the FBAR applies to your unique situation can be a costly mistake.

Between the staggering monetary penalties as a consequence of neglecting to report and the constantly changing laws, any U.S. Person as already defined in this article, should seek the counsel of a well qualified CPA who fully understands the reporting requirements, along with the person’s unique situation.

Our staff at Onisko & Scholz brings decades of experience to the table and they’re waiting to hear from you.

For more information on how we can help with your FBAR reporting requirements, please call us today at 562-420-3100 or email info@oniskoscholz.com