Some of the largest penalties for failing to file a report with the Government are associated with reporting dealings with foreign financial institutions. U.S. citizens and residents with a financial interest in or signature or other authority over any foreign financial account need to report that relationship by filing FinCEN Form 114 if the aggregate value of the accounts exceeds $10,000 at any time during the year. Although the official designation of the report is FinCEN 114, it is commonly referred to as the FBAR (foreign bank account report).
See Relax Tax’s Debt Guide at relaxtax.com/debt
The due date for 2020’s report is April 15, 2021, with an automatic 6-month extension to October 15, 2021.
Failure to file can result in draconian penalties. Non-willful failure to file or timely file an FBAR is subject to a maximum penalty of $10,000, while willfully failing to file or timely file the report can result in a maximum $10,000 penalty for each foreign account that’s not reported.
Form 114 is filed electronically with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) BSA E-Filing System and not as part of the individual’s income tax filing with the IRS.
Keep in mind that “financial account” includes securities, brokerage, savings, checking, deposit, time deposit, or other accounts at a financial institution. Commodity futures and options accounts, mutual funds, and even non-monetary assets such as gold are also included. It becomes a “foreign financial account” if the financial institution is located in a foreign country. If you own shares of a foreign stock or a mutual fund that invests in foreign stocks, and the stock or fund is held in an account at a financial institution or brokerage located in the U.S., this is not considered a foreign financial account, and the FBAR rules don’t apply to it. An account maintained with the branch of a foreign bank physically located in the U.S. also is not a foreign financial account.
See this related post from Dennis Harabin: You May Need to File Estimated Tax Payments
Estimated tax payments are not just for the self-employed. They are for anyone whose withholding and tax credits are significantly less than their projected tax liability, and if used properly, can protect a taxpayer from underpayment penalties.
You may have an FBAR requirement and not even realize it. For instance, perhaps you have relatives residing in a foreign county and they have put you on their bank accounts in case something happens to them. If the combined value of those accounts exceeds $10,000 at any time during the year, you will need to file the FBAR. Or if you are gambling on the Internet, that online casino may be located in a foreign country, and if your account exceeds the $10,000 limit at any time during the year, you will have an FBAR reporting requirement.
You may also have an additional requirement to file IRS Form 8938, which is similar to the FBAR requirement but applies to a wider range of foreign assets with a higher dollar threshold. If you are married and you and your spouse file a joint return, you must file Form 8938 if the value of certain foreign financial assets exceeds $100,000 at the end of the year or $150,000 at any time during the year. If you live abroad, the thresholds are $400,000 and $600,000, respectively. For other filing statuses, the thresholds are half of those amounts. The penalty for failing to file the 8938 is $10,000 per year, and if the failure continues for more than 90 days after you receive an IRS notice of failure to file, the penalty can go as high as $50,000.
Unlike the FBAR, which is a separate stand alone filing, the 8938 is included with an individual’s annual tax return (1040, 1040-SR or 1040-NR).
The following chart illustrates commonly encountered foreign reporting requirements.
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COMMONLY ENCOUNTERED FOREIGN REPORTING REQUIREMENTS
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FORM 8938
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FinCEN FORM 114 (FBAR)
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| Financial (deposit and custodial) accounts held at foreign financial institutions |
Yes
|
Yes
|
| Financial account held at a foreign branch of a U.S. financial institution |
No
|
Yes
|
| Financial account held at a U.S. branch of a foreign financial institution |
No
|
No
|
| Foreign financial account for which you have signature authority | No, unless you otherwise have an interest in the account as described above | Yes, subject to exceptions |
| Foreign stock or securities held in a financial account at a foreign financial institution | The account itself is subject to reporting, but the contents of the account do not have to be separately reported | The account itself is subject to reporting, but the contents of the account do not have to be separately reported |
| Foreign stock or securities not held in a financial account |
Yes
|
No
|
| Foreign partnership interests |
Yes
|
No
|
| Indirect interests in foreign financial assets through an entity |
No
|
Yes, if sufficient ownership or beneficial interest (i.e., a greater than 50 percent interest) in the entity. See instructions for further detail. |
| Foreign mutual funds |
Yes
|
Yes
|
| Domestic mutual fund investing in foreign stocks and securities |
No
|
No
|
| Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust for which you are the grantor | Yes, as to both foreign accounts and foreign non-account investment assets | Yes, as to foreign accounts |
| Foreign-issued life insurance or annuity contract with a cash-value |
Yes
|
Yes
|
| Foreign hedge funds and foreign private equity funds |
Yes
|
No
|
| Foreign real estate held directly |
No
|
No
|
| Foreign real estate held through a foreign entity | No, but the foreign entity itself is a specified foreign financial asset and its maximum value includes the value of the real estate |
No
|
| Foreign currency held directly |
No
|
No
|
| Precious Metals held directly |
No
|
No
|
| Personal property, held directly, such as art, antiques, jewelry, cars and other collectibles |
No
|
No
|
| ‘Social Security’- type program benefits provided by a foreign government |
No
|
No
|
See this related post from Dennis Harabin: Choosing the Right Tax Filing Status
The couple combines their incomes, deductions, and credits on a jointly filed return. They are jointly and separately liable for the tax determined on the return. Because filing status is based on the taxpayers’ marital status on December 31 of each year, this means that couples who marry during the year, regardless of the date of the marriage, are eligible to file MFJ (but a special rule applies for nonresident aliens – see below). Likewise, those who divorce during the year are not qualified to file MFJ for the year when the divorce is made final. A couple that is separated but still married as of December 31 may file either MFJ or Married Filing Separate (or possibly Head of Household, as explained below), and neither spouse can file using the single status.
As you can see, not complying with the foreign account reporting requirements can have some very nasty repercussions. If you need assistance in meeting your foreign account reporting obligations, please give us a call at 551-249-1040.
Do you need more information? You can reach out to Dennis Harabin at Relax Tax today!
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