If a U.S. person has a financial interest or signature authority over a foreign financial account, including, but not limited to, a bank account, brokerage account, mutual fund or a foreign trust, and this account’s balance exceeds a threshold of $10,000 any time during the calendar year, the Bank Secrecy Act may require this U.S. person to report the account information on an annual basis.
Currently, U.S. taxpayers may report this information by electronically filing a Financial Crimes Enforcement Network (FinCEN) Form 114, The Report of Foreign Bank and Financial Account (FBAR). Prior to Sept. 30, 2013, U.S. taxpayers reported their foreign account information on Form TD F 90-22.1. Overall, the FBAR filing is for informational purposes, only, and mandated by the Department of Treasury, not by the IRS. However, the IRS has principal responsibility to enforce FBAR filing requirements.
In addition to account holders being subject to FBAR requirements, the filing obligations also affect persons with “signatory authority” over foreign accounts. Signatory authority is generally interpreted to include anyone with the power to directly use, or direct the use of, the funds in the account, casting a wide net over the pool of U.S. taxpayers. In addition, effective July 29, 2013, filers are allowed to submit FBARs jointly with their spouses, and may also use a third- party preparer to file the FBAR on their behalf.
Starting next year, FBAR filers will see some significant changes, due to President Obama signing into law P.L. 114-41, the “Surface Transportation and Veterans Health Care Choice Improvement Act of 2015,” effective July 31, 2015. The act mandates substantial changes to the due dates and extended due dates of tax returns for years ending after Dec. 31, 2015.
As a result of the new rules, the filing requirement for FBARs for the 2016 calendar year, and thereafter, will be April 15, with a six-month extension until Oct. 15, available upon request. Currently, the FBAR filing deadline is June 30, with no extension available. The act modifies the FBAR filing deadline from June 30 to April 15, in order to align it with the Federal filing deadline for individual income tax returns. The new rules, however, do not change the fact that the FBAR must be filed electronically with FinCEN, and separately and apart from the taxpayer’s income tax return.
Coordination between the FBAR filing and income tax returns is achieved through certain questions on the IRS tax return forms, and false answers allow the IRS to bring tax perjury or tax evasion charges against the taxpayer. For example, for an individual taxpayer who held a foreign account in 2015, Part III of Schedule B on IRS Form 1040 asks, “[A]t any time during 2015, did you have a financial interest in, or signature authority over, a financial account (such as a bank account, securities account or brokerage account) located in a foreign country?” If the answer is “yes,” the return then also asks whether a taxpayer is required to file FinCEN Form 114.
In addition, failure to file the FBAR is an independent action subject to its own punitive civil penalties and potential felony criminal charges. Practitioners who receive information that their clients have foreign financial accounts that were not previously reported for income tax return or FBAR filing purposes, should recommend that the clients seek services of a tax counsel.
Beginning with the 2016 FBAR, the filing deadline for U.S. citizens and residents residing abroad will be automatically extended from April 15 until June 15, with an additional extension available upon request until Oct. 15. The new rules also give the Federal government the authority to waive penalties for first-time FBAR filers who failed to file an extension on time. However, to be able to obtain the penalty relief, taxpayers must file the FBAR by Oct. 15. The Department of Treasury has not yet published the rules on how a taxpayer can request an extension to file an FBAR. At this point, it is also unclear whether taxpayers will be able to request an extension to file an FBAR in conjunction with a request for an extension to file a tax return, or if a separate FinCEN filing will be required.
Taxpayers with certain foreign financial assets that exceed specified thresholds must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets, which is attached to their income tax return. The foreign financial assets can potentially include foreign accounts reported on an FBAR. However, Form 8938 is an additional requirement to the FBAR, not a substitute filing. Taxpayers should also understand that changes to the FBAR rules do not relieve them from reporting foreign accounts and/or assets on other forms attached to their tax returns, such as Schedule B, Forms 5471, 3520 and 3520-A.
The act, in addition to modifying the FBAR filing deadline, also changes the filing deadlines for partnerships, S Corporations and C Corporations. It also overturns the Supreme Court’s decision in Home Concrete v. United States, 132 S.Ct. 1836 (2012), where the Court held that an overstatement of basis does not result in an omission of income, which triggers the six-year statute of limitations on assessment. In fact, the act amends Section 6501(e)(1)(B) of the Internal Revenue Code to explicitly include an overstatement of basis in the definition of the omission from gross income.