Reporting Money Held In Foreign Bank Accounts

Reporting Money Held in Foreign Bank Accounts

Any person can open a bank account outside of the United States. However, there are guidelines of what to do when someone opens up a foreign bank account/s. When a person is a United States citizen, resident, or entity they must file a Foreign Bank Account Report ("FBAR") with the Financial Crimes Enforcement Network ("FinCEN") if they meet certain conditions, which are:

  • First, they must be a United States citizen, resident, or entity.
  • Second, they must have a financial interest or signature authority over an account.
  • Third, the financial account must be held in a foreign country.
  • Fourth, the total value of the account/s must be more than $10,000.

Who qualifies as a United States citizen, resident, or entity? A person who has obtained citizenship in the United States can be either by birth or through the naturalization process. A resident of the United States can be those who possess a green card or have a substantial presence. An entity is any non-person, such as business or organization, which is incorporated in the United States.

What financial interest must one have in the account/s for it to be reported by them? If the person or entity holds the account in their name, for the benefit of a United States person, or if a United States person possess greater than a fifty percent share of the title holding entity.

Where must a bank account be located for it to be considered foreign? Any bank outside of the United States, its territories, and possessions is considered a foreign bank account. Even if the bank the money is held in is an American bank, it is considered "foreign" if located outside the United States. Banks in Indian territories and military installations are considered inside the United States.

How much money must be in the account before it is required to be reported? When the total amount stored in foreign bank accounts is more than $10,000 at any point during the year, those bank accounts must be reported. This means if multiple accounts are opened overseas and their total monetary value is more than $10,000, each account must be reported in the FBAR.

What types of assets stored in foreign bank accounts must be reported? Money held in bank accounts, securities, brokerage accounts, stocks, bonds, insurance policies, annuities, futures, option accounts, and mutual funds all qualify as reportable assets in the FBAR. If the total value of any of the reportable assets held total more than $10,000, all of the accounts must be reported. The FBAR must be filed if at any point during the year the value of the account/s exceeded $10,000. Spouses may file a combined FBAR when they share joint accounts. When the account is in foreign currency the exchange rate will be what it was on December 31 prior to the June 30 deadline.

The decision to file the FBAR must be made each year based on the highest value of the account/s during the year. The FBAR must be filed on or before June 30. The FBAR will not be considered filed until received by the United States Department of Treasury in Detroit, Michigan. Once filed, the record of the account/s must be retained for five years. The records must include the name over the account/s, the bank’s name and address, the type of account, and the highest value of the account/s during the filing period. Failure to file an FBAR when the conditions are met can result in severe civil and criminal penalties.

The criminal penalty for failing to file the FBAR is a fine not more than $250,000 and imprisonment not more than five years. Failure to file an FBAR while breaking other laws could increase the maximum fine to $500,000 and the maximum jail time to ten years. It is a separate violation each day the FBAR is not filed. If it is a financial institution that breaks the law, the fine cannot be less than twice the amount of the transaction but no more than $1,000,000.

The civil penalties can be assessed as either a willful or non-willful violation. A violation is willful when the act is voluntary and intentional. The required intent is a desire to avoid filing the FBAR. Also, willful blindness can lead to a willful violation. Willful blindness is an effort made not to learn of the FBAR requirements. Evidence of willfulness can be established by reasonable inferences. There is a six-year statute of limitations from the date of the transaction for a penalty to be assessed.

Civil penalties for a non-willful violation cannot exceed $10,000. Civil Penalties for a willful violation shall be the higher value of either $100,000 or fifty percent of the amount of the transaction or fifty percent of the balance of the account. If a business or financial institution exercises ordinary care while failing to file the FBAR, a penalty can be assessed for negligence. A $500 fine is issued for each negligent violation. If the institution or business is found to engage in a pattern of negligence than a maximum penalty of $50,000 can be added alongside the $500 simple negligence penalty.

The penalty for willful and non-willful violations can be reduced if certain circumstances are present. The penalties can be reduced if the person has no history of past FBAR violations, no money was from illegal activities, the person cooperates with the investigation, and the person did not get a civil penalty from the IRS for failure to report income related to the amount held in the foreign account. Also, to qualify for a penalty reduction the person cannot have criminal tax or bank secrecy act convictions during the preceding ten years. The penalty for negligence cannot be reduced.

For a non-willful violation there are three levels of reduced penalties based on mitigating circumstances. Level I is when the aggregate balance did not exceed $50,000 than the penalty is $500 for each violation and cannot exceed $5,000 for all violations. Level II is when the aggregate balance does not exceed $250,000. The penalty for level II is $5,000 for each violation but no more than ten percent of the maximum balance. A level III violation occurs when the aggregate balance exceeds $250,000. There is a $10,000 penalty for each level III violation.

For a willful violation there are four levels of reduced penalties. Level I is when the aggregate balance does not exceed $50,000. The penalty for level I is $1,000 per violation or five percent of the maximum balance in the account. Level II is when the aggregate balance does not exceed $250,000. The penalty for level II is $5,000 per violation or ten percent of the maximum balance in the account. Level III is when the aggregate balance does not exceed $1,000,000. The penalty for level III is the higher value of either ten percent of the maximum balance in the account or fifty percent of the closing balance on the last day to file the FBAR. Level IV is when the aggregate balance exceeds $1,000,000. The penalty for level IV is the greater of either $100,000 or fifty percent of the closing balance in the account on the last day to file the FBAR.

Sources Used

http://www.irs.gov/irm/part4/irm_04-026-016.html#d0e529

http://www.irsvideos.gov/ElectronicFBAR/

31 U.S.C. 5321

31 U.S.C. 5322

Additional sources of information

http://www.fincen.gov/

http://www.forbes.com/sites/robertwood/2012/06/04/fbar-penalties-when-will-irs-let-you-off-with-a-warning/

Contact Our Firm

At McKellar & Easter, Attorneys at Law, we understand tax law in all its intricacies, which means we know how to defend our clients when criminal charges arise. Trust our firm to handle your case with integrity and skill.

To schedule a free initial telephone consultation with one of our experienced defense attorneys, contact our law offices in Knoxville, Tennessee; Nashville, Tennessee; or Atlanta, Georgia, by calling 865-566-0125 or filling out this contact form. We accept credit cards.