Don’t Overlook Foreign Account Reporting Requirements

Article Summary:

    • Foreign Account Reporting Requirement
    • Financial Crimes Enforcement Network
    • Penalties for Failure to File
    • Type of Accounts Affected
    • Form 8938 Filing Requirements

Some of the largest penalties for failing to file a report with the Government are associated with reporting dealings with foreign financial institutions.  U.S. citizens and residents with a financial interest in or signature or other authority over any foreign financial account need to report that relationship by filing FinCEN Form 114 if the aggregate value of the accounts exceeds $10,000 at any time during the year. Although the official designation of the report is FinCEN 114, it is commonly referred to as the FBAR (foreign bank account report).  

The due date for  2020’s report is April 15, 2021, with an automatic 6-month extension to October 15, 2021.    

Failure to file can result in draconian penalties. Non-willful failure to file or timely file an FBAR is subject to a maximum penalty of $10,000, while willfully failing to file or timely file the report can result in a maximum $10,000 penalty for each foreign account that’s not reported. 

Form 114 is filed electronically with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) BSA E-Filing System and not as part of the individual’s income tax filing with the IRS.

Keep in mind that “financial account” includes securities, brokerage, savings, checking, deposit, time deposit, or other accounts at a financial institution. Commodity futures and options accounts, mutual funds, and even non-monetary assets such as gold are also included. It becomes a “foreign financial account” if the financial institution is located in a foreign country. If you own shares of a foreign stock or a mutual fund that invests in foreign stocks, and the stock or fund is held in an account at a financial institution or brokerage located in the U.S., this is not considered a foreign financial account, and the FBAR rules don’t apply to it. An account maintained with the branch of a foreign bank physically located in the U.S. also is not a foreign financial account. 

You may have an FBAR requirement and not even realize it. For instance, perhaps you have relatives residing in a foreign county and they have put you on their bank accounts in case something happens to them. If the combined value of those accounts exceeds $10,000 at any time during the year, you will need to file the FBAR. Or if you are gambling on the Internet, that online casino may be located in a foreign country, and if your account exceeds the $10,000 limit at any time during the year, you will have an FBAR reporting requirement.

You may also have an additional requirement to file IRS Form 8938, which is similar to the FBAR requirement but applies to a wider range of foreign assets with a higher dollar threshold. If you are married and you and your spouse file a joint return, you must file Form 8938 if the value of certain foreign financial assets exceeds $100,000 at the end of the year or $150,000 at any time during the year. If you live abroad, the thresholds are $400,000 and $600,000, respectively. For other filing statuses, the thresholds are half of those amounts. The penalty for failing to file the 8938 is $10,000 per year, and if the failure continues for more than 90 days after you receive an IRS notice of failure to file, the penalty can go as high as $50,000.

Unlike the FBAR, which is a separate stand alone filing, the 8938 is included with an individual’s annual tax return (1040, 1040-SR or 1040-NR).  

The following chart illustrates commonly encountered foreign reporting requirements.

COMMONLY ENCOUNTERED FOREIGN REPORTING REQUIREMENTS
-
FORM 8938
FinCEN FORM 114 (FBAR)
Financial (deposit and custodial) accounts held at foreign financial institutions
Yes
Yes
Financial account held at a foreign branch of a U.S. financial institution
No
Yes
Financial account held at a U.S. branch of a foreign financial institution
No
No
Foreign financial account for which you have signature authority No, unless you otherwise have an interest in the account as described above Yes, subject to exceptions
Foreign stock or securities held in a financial account at a foreign financial institution The account itself is subject to reporting, but the contents of the account do not have to be separately reported The account itself is subject to reporting, but the contents of the account do not have to be separately reported
Foreign stock or securities not held in a financial account
Yes
No
Foreign partnership interests
Yes
No
Indirect interests in foreign financial assets through an entity
No
Yes, if sufficient ownership or beneficial interest (i.e., a greater than 50 percent interest) in the entity. See instructions for further detail.
Foreign mutual funds
Yes
Yes
Domestic mutual fund investing in foreign stocks and securities
No
No
Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust for which you are the grantor Yes, as to both foreign accounts and foreign non-account investment assets Yes, as to foreign accounts
Foreign-issued life insurance or annuity contract with a cash-value
Yes
Yes
Foreign hedge funds and foreign private equity funds
Yes
No
Foreign real estate held directly
No
No
Foreign real estate held through a foreign entity No, but the foreign entity itself is a specified foreign financial asset and its maximum value includes the value of the real estate
No
Foreign currency held directly
No
No
Precious Metals held directly
No
No
Personal property, held directly, such as art, antiques, jewelry, cars and other collectibles
No
No
‘Social Security’- type program benefits provided by a foreign government
No
No


As you can see, not complying with the foreign account reporting requirements can have some very nasty repercussions. If you need assistance in meeting your foreign account reporting obligations, please give us a call at 551-249-1040.

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