Foreign Asset Reporting – What Are My Reporting Requirements?
Part I – Foreign Accounts
By Matthew E. Miller, CPA, MBA and Sharan Sawhney, CPA
Many taxpayers are still uncertain as to the reporting requirements they are subject to when they hold assets outside of the United States. This article will focus on the reporting requirements for foreign financial accounts.
Foreign Bank Accounts (FBAR)
The government requires U.S. persons that have an interest in foreign financial accounts to file FinCEN Form 114 (FBAR) when the aggregate value of the accounts exceeds $10,000 at any time during the calendar year. Here are the important aspects of the requirements that you need to know.
A U.S. Person includes:
- U.S. citizens or resident aliens, and
- Domestic legal entities:
- Trusts, and
You ‘have an interest in’ – By definition, you have an interest in a foreign financial account when:
- You are the owner of record or holder of legal title;
- the owner of record or holder of legal title is your agent or representative; or
- when you have a sufficient interest in the entity that is the owner of record or holder of legal title.
- Additionally, when you have signature authority over the account, you have a financial interest in the account. You have authority to control the disposition of the assets in the account by direct communication with the financial institution maintaining the account.
Example #1 – John is a United States citizen. His brother Paul maintains bank accounts in Mexico on behalf of John. The accounts are held in Paul’s name but Paul only accesses the accounts in accordance with his brother’s instructions. John has a financial interest in the Mexican bank accounts for FBAR reporting purposes. If his brother Paul is a United States citizen or resident, he also has an FB AR reporting requirement with respect to the accounts.
Example #2a – Tommy is a US Citizen. He previously worked in Canada and receives retirement benefits which are automatically deposited into a savings account he maintains in Canada. In prior years the account balance has always been under the filing threshold of $10,000 because he periodically transfers his retirement benefits to an account in the United States. During 2016, because of earnings on the account, the highest balance during the year was $10,136. Must Tommy file the FBAR?
The answer is Yes. No tax is due by Tommy. He must simply comply with the filing requirement. It’s important to note that the aggregate value test is:
the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported.
Two important points:
1. The value is not measure as of the last day of a month or the last day of the year. The value is measured on each and every day during the year. 365 measurements!
2. Aggregate means aggregate – the aggregate value of all foreign financial accounts. You need to measure the value of all foreign accounts at the end of each day and aggregate the values.
Example #2b – Tommy and Danielle are married and file a joint US tax return. Tommy maintains an account in Canada. The highest balance during calendar year 2016 was $8,472. Danielle, of Irish decent, has an account back home with the Bank of Ireland. During the year, her average balance was €3961. What are Tommy and Danielle’s compliance requirement steps?
New Rule: When converting foreign currency, the taxpayer may do so using the exchange rate as of the last day of the calendar year. This does not mean convert the ending value at the end of the year. This rule means you may use the exchange rate as of the last day of the calendar year to convert the foreign currency value at each day during the year.
So Danielle must determine the highest value in her Bank of Ireland account during the year and convert from Euros to US Dollars at the exchange rate on the last day of the year. Tommy and Danielle must aggregate the balances of each of their accounts. If the aggregate balances exceed $10,000 at any time during the year, they must file an FBAR. Tommy and Danielle may file a joint return.
Signature Authority: Signature authority is the authority of an individual (alone or in conjunction with another individual) to control the disposition of assets held in a foreign financial account by direct communication (whether in writing or otherwise) to the bank or other financial institution that maintains the financial account.
Example #2c – Danielle has power of attorney over her elderly parents’ accounts in Ireland, but she has never exercised the power of attorney. Danielle is required to file an FBAR if the power of attorney gives her signature authority over the financial accounts. Whether or not the authority is ever exercised is irrelevant to the FBAR filing requirement.
When Tommy and Danielle file their FBAR to report their two bank accounts, they must also disclose Danielle’s signature authority over her parents’ account(s).
Reporting Jointly Held Accounts – If two persons jointly maintain a foreign financial account, or if several persons each own a partial interest in an account, then each United States person has a financial interest in that account and each person must report the entire value of the account on an FBAR.
Example #3 – Lilly and Sabastian are joint owners in a foreign financial account. During 2016, the highest balance at any time was $25,438. Lilly is a US citizen. Lilly must file an FBAR form disclosing her name, address, social security number, and date of birth. She must also then report the maximum value of the account, type of account, name and address of the financial institution. She must also include in her FBAR filing the same information for Sabastian.
What is a Financial Account? Financial account includes the following types of accounts:
- Bank accounts: checking, savings, time deposits
- Securities accounts,
- Insurance policies with a cash surrender value,
- Mutual funds held outside of a US based securities broker, or
- Any other accounts maintained in a foreign financial institution
Foreign Account Exceptions: There are foreign account exceptions from the FBAR filing requirements. Here is a list of the typical exceptions:
- Participants in and beneficiaries of tax-qualified retirement plans
- Foreign financial accounts maintained on a United States military banking facility
- Owners and beneficiaries of U.S. IRAs
- United States persons included in a consolidated FBAR
How and when do you file? You file your FBAR form electronically. The filing deadline is April 15th of each year. If you file an extension for your individual income tax return until October 15th, you are granted an automatic extension of the due date of your FBAR.
As you can see, the rules pertaining to FBAR compliance are relatively simple to understand. If you are a US Citizen or a US entity and if you have a foreign account(s) with aggregate balance greater than $10,000 on any day during the year, you must file an FBAR by April 15th of each year.
The complexities of compliance begin with the unusual or unexpected events:
- You have POA for your parents and they have foreign accounts in excess of the threshold,
- Your aunt living in a foreign country dies, you are her the sole beneficiary of her estate,
- You own partial interest in a foreign financial account with other people,
- You are a minority partner in a business with a foreign financial account, or
- You are a majority owner of a business with a foreign financial account.
Each of these events has to be evaluated for compliance.
Be aware, be knowledgeable, ask for help. We are happy to help.