Are you aware that if you keep even a modest amount of money in foreign bank accounts, you could be suspected by the U.S. government of money laundering?
But don’t panic. We’ll help you keep your business affairs legal.
In this article, we’ll introduce you to the laws and regulations you need to know, such as the Bank Secrecy Act and FBAR. And most importantly, we’ll show you how to report money in foreign bank accounts.
What is a Foreign Account?
The U.S. considers a foreign country as a land other than those it officially lists as its territories or possessions. So, a foreign account would originate anywhere the U.S. doesn’t recognize as under its authority. U.S. lands include:
- American Samoa (Mauna Island, Swain’s Island, Tutuila Island)
- Commonwealth of Puerto Rico
- Commonwealth of Northern Mariana Islands (Rota Island, Saipan Island, Tinian Island)
- Guam
- Indian lands (according to the Indian Gaming Regulatory Act)
- Strategic Trust Territory of the Pacific Islands (Federated States of Micronesia, the Republic of the Marshall Islands, Republic of Palau)
- U.S. Virgin Islands (Saint Croix Island, Saint John Island, Saint Thomas Island)
- Wake Island Atoll (Wake Island)
What is FBAR?
It has been a longstanding requirement that U.S. persons report their foreign bank holdings. The country passed the Bank Secrecy Act in 1970 that mandates filing an FBAR or Report of Foreign Bank and Financial Accounts.
The Bank Secrecy Act is officially known as the Currency and Foreign Transactions Reporting Act. While the “Bank Secrecy Act” or BSA has a nice ring to it, the “Currency and Foreign Transactions Reporting Act” gives you a better idea of the scope of the law.
The Purpose of Banking Laws
There’s yet another name for the BSA. People refer to it as the anti-money laundering law. That, too, sheds light on the purpose of the legislation.
Under the rules of the BSA, U.S. banks and other financial concerns must perform due diligence to identify potential money laundering efforts.
Money laundering is the colorful term describing a criminal effort to make illegally obtained money appear legal. The steps can become complicated, involving moving currency through a myriad of transactions and financial institutions scattered around the world.
U.S. financial institutions also must report any activity suggesting tax evasion or other misdeeds. As part of their function, banks and similar financial concerns have to keep detailed records of all their customer transactions. But the customers also are required to keep good foreign bank account reporting records.
Keep Accurate Records
If you deal with a foreign financial account for your personal needs, you have to keep five years of records. First of all, your bookkeeping needs to list the specific name attached to each account.
You’ll also need to describe the type of the account and give the account number or other identifier if the institution doesn’t use traditional account numbers.
Write down the name of the foreign bank and its address. Importantly, note the highest balance in each account at any point during the applicable period.
Who Needs to File?
The BSA affects all U.S. citizens and residents. It also involves U.S. business structures, such as corporations, limited liability companies, and partnerships. A third group is legal U.S. entities like estates and trusts.
Government websites addressing FBAR will often refer to anyone subject to filing as a U.S. person. The term “person” includes any form of legal entity relevant to FBAR.
The Account Balance
Persons maintaining foreign financial accounts, such as a bank or brokerage account, may have to file an FBAR. The chief determining factor is the account’s value. They must report if the total value of all their non-U.S. accounts surpasses $10,000 at some point during the reporting period.
So, the number of foreign accounts doesn’t matter. A person could keep a dozen or more such accounts. The U.S. Treasury is only concerned if the collective balance goes past the $10,000 mark.
This illustrates why it’s important to stay abreast of the health of your accounts. You should receive, at the minimum, quarterly statements.
A sudden development in the economy of a distant country could have a positive impact on your holdings. The increase in value could push your total balance across all accounts past $10,000.
However, without an account statement, you may not notice. The economy could correct itself rather quickly, lowering your balance as swiftly as it raised it.
The result could leave you at the end of the year with less than $10,000 but still in need of reporting. The period when your holdings surged makes you subject to filing.
Convert Balance into U.S. Currency
Determine how much to report by converting the account’s maximum balance as stated in the host country’s currency into U.S. dollars. Use the exchange rate on December 31 of the reporting year.
Specifically, you want to use the Treasury’s listed exchange rate. If that’s not possible, choose another recognized exchange rate. Then state that source in your report.
FBAR Rules Differ From Tax Regulations
It’s the account and its value that’s important. It doesn’t matter if the account fails to produce new income during the year. It’s also irrelevant whether the income is taxable.
FBAR is not focused primarily on taxes. Its chief concern is the location of your assets.
Also, be aware the IRS and BSA may view disregarded entities differently. Your business may be a disregarded entity for tax purposes, but it may still have to file an FBAR.
The BSA is neutral regarding tax treaties. Once again, the BSA operates independently of the rules overseeing taxes. If your funds are held in countries that are signatories to tax treaties with the U.S., you could still be required to file an FBAR.
Types of Foreign Financial Accounts
Any financial account in a foreign institution could be subject to the BSA. Check annually with the Treasury Department for the latest information. We’ll cite the most common types of accounts, but you shouldn’t consider the list all-inclusive.
Bank accounts are a primary means of keeping money in a foreign financial concern. This includes checking and savings accounts, plus time deposits.
There are several ways to invest your money beyond the U.S. and become subject to an FBAR filing. There’s a general brokerage account, plus particular instruments, such as mutual funds, derivatives, commodity futures, and options.
Don’t overlook insurance. Some policies, such as permanent or whole life, can accrue cash value.
Foreign Accounts That Don’t Require Filing
There are exceptions where a U.S. citizen or resident doesn’t have to report money in a foreign account. For example, you don’t have to file an FBAR report for nostro or correspondent accounts.
Nostro Accounts
Nostro or correspondent accounts are accounts where your U.S. bank maintains an account in a foreign country in that country’s currency. Banks set up these arrangements to conduct faster international trades involving currency exchanges.
But it’s not an account that you established. So, you’re not responsible for reporting it.
International and Government-Affiliated Accounts
Accounts of an international financial institution to which the U.S. belongs, such as the International Monetary Fund, are exempt. So are domestic government entities, such as state colleges. You also don’t have to file an FBAR if your account is with a financial entity on a U.S. military facility outside the U.S.
Retirement Accounts
Rules about retirement accounts are subject to change. Consult your accountant for the latest guidelines. The confusion lies with the type of account.
For example, you may own an individual retirement account or IRA based in the U.S., but the domestic account possesses a foreign financial account. You’re not responsible for how the managers of U.S.-based retirement accounts invest monies, so you don’t have to worry about reporting.
The same exemption applies if you’re not the owner but a beneficiary. You’re also exempt as a participant or beneficiary of a group retirement plan.
But the government views foreign-based retirement accounts differently. For example, it lists specific Canadian and Mexican retirement accounts subject to an FBAR filing. There are two examples given from each country.
In Canada, there’s the RRSP or Canadian Registered Retirement Savings Plan. And there’s the TFSA or Canadian Tax-Free Savings Account. From Mexico, there’s the Fondos para el Retiro, which are individual accounts, and the AFORE or Mexican Administradoras de Dondos para el Retiro.
Trusts
You don’t have to report a trust that lists you as a beneficiary as long as the U.S. citizen or resident who oversees the trust files an FBAR for the account. Also exempt are foreign private equity funds and hedge funds.
Other Ways You Can Be Exempt
You can avoid filing an FBAR for a specific account if you list it on a consolidated report. And if you and your spouse jointly own all your non-U.S. accounts, you don’t have to file if your spouse does.
Your spouse would have to report all the accounts. Plus, you would have to authorize your spouse to file for you. You give authorization by submitting FinCEN Form 114a.
How you file an FBAR and report your income tax can differ. You can file a joint FBAR but file your income tax separately as a married couple.
How to File an FBAR
The standard arrangement for filing an FBAR is e-filing. The U.S. government has a dedicated FinCEN BSA reporting system through its secure network.
The electronic method is so effective that you can’t file a paper FBAR without approval. You have to call FinCEN to request your exemption.
If you receive an exemption, you’ll receive the paper version of FBAR. You can then submit the completed form to the designated IRS address listed in the instructions.
Note that paper submissions use a different form than electronic submissions. E-filings use the standard FinCEN Form 114.
How to Give Someone Permission to File for You
You can grant someone permission to file your FBAR using FinCEN Report 114a. Complete the document and keep it safe with your FBAR records.
But don’t turn it over to the government when you submit your FBAR. The FinCEN or the IRS will request it if necessary.
Computer Requirements for Filing
You’ll need to install Adobe Reader on your computer to read the BSA forms. The program must be on your workstation.
BSA’s filing system won’t work if Adobe is on a server. It also doesn’t work with Remote Desktop Services, formerly known as Terminal Services.
BSA forms currently work with three web browsers, namely, Internet Explorer (version 10 or later), Google Chrome (version 41.0 or later), and Mozilla Firefox (version 35.0 or later). BSA does not at present work with Microsoft Edge or Apple Safari.
The Treasury warns that if your browser doesn’t meet the requirements, you can still access the system, but you’re likely to experience issues.
If you use Internet Explorer, you have the option of opening the BSA’s PDF files in the browser window or with the Adobe Reader software. But if you use Google Chrome or Mozilla Firefox, you have to configure the browser so that it doesn’t try to open the PDF files in the browser window. Instead, you want the browser to download the files.
Filing Deadline
Similar to your income tax, your FBAR is due by April 15. And, like taxes, it reflects the activity of the previous calendar year.
If you need more time to create the report, you have until October 15, thanks to an automatic extension. No request for an extension is necessary.
If you don’t have all the data you need to file a complete report by October 15, you should file an incomplete version. You can update it when you receive the missing information. That’s better than having to file a delinquent FBAR.
FinCEN often expands relief in times of natural disasters. For example, victims of hurricanes, storms, and floods in several states and Puerto Rico received a deadline of February 15, 2023, to file reports for 2021. FinCEN also pledged to cooperate with anyone who didn’t live in the affected areas but needed records from those areas.
What Happens if You Don’t File?
Individuals and institutions that fail to file are subject to criminal and civil penalties. The government classifies individuals who didn’t file as non-willful or willful violators.
Civil monetary penalties for non-willful violations change yearly to keep pace with inflation. Civil penalties for willful violations can be the standard amount or as much as 50% of the account’s highest value during the period in question.
Criminal penalties for a false FBAR can include $10,000, a five-year prison sentence, or both. Failure to file or keep records can carry a penalty of up to $250,000, five years behind bars, or both. If there are additional violations of other laws, you could be looking at $500,000, 10 years imprisonment, or both.
Meet the Experts on Foreign Bank Accounts
if your days are already bursting at the seams with responsibilities, you’re probably not looking forward to having to file FBAR reports, too. It takes time to get a firm grasp on the subject of reporting foreign bank accounts.
Why not entrust the task to experts? International Tax Consultants is home to accountants, tax advisors, and attorneys. We have experience filing FBAR reports for clients with money positioned globally.
So contact us today. Find out what we can do for you.