What Is An FBAR, And When Do I Need To File It?
What is an FBAR, and when do I need to file it?
Some may already be aware of the US requirement to file an annual report to disclose non-US assets. The report is formally known as FinCEN Form 114 – Report of Foreign Bank and Financial Accounts, or “FBAR”, for short. The requirement to file an FBAR, in one form or another, has existed for many years. In 2013, the current version of the form (FinCEN Form 114), replaced the former Form TD F 90-22.1.
The policy reasons for requiring this filing are relatively simple. Under the Foreign Account Tax Compliance Act (FATCA), which was passed into law on March 18th, 2010 by the 111th US Congress, many foreign governments (including all countries we serve) became signatories to an agreement to disclose foreign accounts held by US citizens or residents living abroad. In short, the US enacted a law to identify financial accounts held by US persons abroad in order to prevent offshoring of assets and income. Further, because the US secured the cooperation of almost all major countries to identify these accounts, it is no longer possible to avoid the necessity of disclosure.
Fortunately, even if a US taxpayer is behind on these obligations, with a bit of work it is essentially a straightforward process to file missing FBARs. But how do you know if you are considered a US taxpayer? Well it turns out that the US is a little unusual, compared to the rest of the world, where tax filing requirements are concerned. The US taxation system is based upon US status—whether citizenship or permanent residence—and requires any person who is considered a US person to file a tax return and any other necessary information returns, regardless of what country a US person lives in. Citizen or legal residency-based taxation is different from the tax rules in other countries, because almost everywhere else in the world, a person only pays tax where they mainly reside.
But, back to FBARs: the basic rule is that you have to file every year if you are a US citizen, permanent resident (usually a Green Card holder), or if you spend 183 days in the US in a year; the actual calculation of days spent in the US extends back to the last three years, but we will leave that alone for the present. All bank accounts, security accounts, and retirement accounts (including defined benefit plans and pensions) located outside the US are subject to reporting on the FBAR. The FBAR is due on April 15th, the same as US personal income tax returns, and is also allowed an automatic extension until October 15th. Filers must provide the highest balance of each account during each calendar year, converted to US dollars using the US Treasury Exchanges Rates as of December 31. If the total maximum balances added together are less than $10,000 US dollars in any particular year, the filer may be exempt from filing for that year.
FBARs and FATCA have significantly changed the landscape of US tax compliance, leading to a record number of US expats renouncing their citizenship or residency in the last decade to alleviate the burden of ongoing US tax reporting. While it is understandable that taxpayers want to keep their financial information private, as well as avoid a dual tax burden, there are many solutions to catch up on filing obligations short of giving of citizenship or residency. The decision to renounce US status should never be made lightly, because of the lifestyle options dual citizenship or residency can offer; US expats should especially reconsider renouncing if the only reason is the surmountable obstacle of tax compliance.
At American Tax Compliance, we offer a number of services to keep our clients current on their FBAR filing obligations, as well as correct any filings which may be past due. If you have any questions, please post below and we will be happy to help you navigate your next steps.
