If you have a financial interest in or signature authority over a foreign financial account, you may be required to file a report each year with the IRS. The FBAR report is required for bank accounts, brokerage accounts, mutual funds, trusts, or other types of foreign financial accounts with an aggregate value exceeding $10,000.
The report must be filed electronically on FinCEN Form 114, Report of Foreign Bank and Financial Accounts, more commonly known as the FBAR. The due date is June 30th, with no extension available and stiff penalties for noncompliance. Taxpayers simply must get this right and recent guidance by the IRS makes it a little easier.
FBAR Reference Guide
The new FBAR Reference Guide issued by the IRS clears up some of the more confusing rules relating to who must report, the accounts subject to reporting and the application of the $10,000 rule.
Who is a United States Person?
A “United States person” means:
• A citizen or resident of the United States;
• An entity created or organized in the United States or under the laws of the United States. The term “entity” includes but is not limited to, a corporation, partnership, and limited liability company;
• A trust formed under the laws of the United States; or
• An estate formed under the laws of the United States.
Disregarded Entities: Entities that are considered U.S. persons under the above rules may have to file an FBAR even if they are disregarded entities. In other words, the federal tax treatment of an entity does not affect the entity’s requirement to file an FBAR.
What is a Disregarded Entity?
A “disregarded entity” is a business entity that elects to have its entity status ignored for federal tax purposes. For example, an LLC may elect to be taxed as a sole proprietorship.
Foreign Financial Accounts
The Reference Guide clarifies that, in addition to bank accounts, mutual funds, insurance policies with a cash value and securities or options accounts must be reported. Other examples of covered accounts include:
• A Canadian Registered Retirement Savings Plan (RRSP)
• Canadian Tax-Free Savings Account (TFSA)
• Mexican individual retirement accounts (Fondos para el Retiro) and
• Mexican Administradoras de Fondos para el Retiro (AFORE).
Note that foreign hedge funds and private equity funds are not reportable on the FBAR.
The IRS offers the following examples to illustrate when an account is considered a foreign account. Foreign accounts are only those maintained with financial institutions located outside of the U.S. or its territories.
■ An account maintained with a branch of a U.S. bank that is physically located in Germany is a foreign financial account.
■ An account maintained with a branch of a French bank that is physically located in Texas is not a foreign financial account.
■ Ed, a U.S. citizen, purchased securities of a French company through a securities broker located in New York. Ed is not required to report these securities because he purchased the securities through a financial institution located in the U.S.