You may think you have all your tax filings taken care of, but have you doubled-checked the FBAR filing requirements closely enough?
Legal entities that are disregarded for income purposes, such as single member limited liability companies (SMLLCs), grantor trusts and estates, may still be required to file an FBAR even if they are not required to file federal income tax returns. The same goes for what is deemed a “U.S. person” such as tax residents or children who are U.S. citizens.
Kids and FBARs
Foreign accounts that are opened by parents, grandparents, other family members or guardians are common these days as multiple generations live to see their families grow and want to provide for the youngest members. It is important to remember that foreign accounts, when owned by or held in the name of U.S. children, still require FBAR filings regardless of whether other income tax filings may be required.
Foreign accounts in the name of minors must still be reported on FinCEN 114 if the aggregate of all foreign accounts exceeds $10,000 at any time during the calendar year. Parents or other tax residents also must report the same foreign accounts on their own FBAR if they have “signature authority” over the accounts.
Other FBAR Traps
While family accounts can result in “surprise” FBAR filings, foreign accounts owned by disregarded entities (for income tax purposes) also can cause additional FBAR problems. Living trusts, which are often grantor trusts disregarded from their owners, still must file FBARs if the thresholds for filing are met. An SMLLC may not have a separate tax return filing requirement (California excluded), but would have an FBAR filing requirement if the SMLLC owned foreign accounts greater than $10,000 in aggregate.
Also, there are other types of foreign financial accounts which U.S. persons may be required to report on an FBAR, above and beyond traditional bank and securities accounts. For instance, financial accounts held at a foreign branch of a U.S. financial institution are required to be reported on FBARs. The same applies for foreign retirement or pension accounts, foreign insurance or annuity policy accounts with cash value, and shares in foreign mutual funds or pooled funds (which are generally publicly available with regular net asset value determinations and redemptions).
The Internal Revenue Manual points out that individually owned bonds, loan notes or stock certificates are not considered “financial accounts” for FBAR reporting purposes (however, they may be reportable on Form 8938, Statement of Specified Foreign Financial Assets). The IRS announcement from mid-2014, regarding Bitcoin and other virtual currency not being subject to FBAR reporting, has remained unchanged for 2016 calendar year FBARs, although this could change in the future (and currently, Bitcoin may be subject to Form 8938 reporting requirements).
Is There a Penalty for Not Filing the FBAR?
Yes, there are penalties for failing to file an FBAR properly. According to the FinCEN 114 instructions, “A person who is required to file an FBAR and fails to properly file may be subject to a civil penalty not to exceed $10,000 per violation. If there is reasonable cause for the failure and the balance in the account is properly reported, no penalty will be imposed. A person who willfully fails to report an account or account identifying information may be subject to a civil monetary penalty equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation.”
FinCEN 114 must be filed electronically through the Treasury Bank Secrecy Act division, and the normal deadline is April 18, 2017. For 2016 FBARs, there is an automatic extension for six months until October 15, 2017.
There will be more information to come regarding the FBAR and Form 8938 in our next series of posts. In the meantime, for additional information, visit the latest FinCEN 114 form instructions here and contact Jim Curtis.