US Tax Guide for Expats (2019): FinCEN Form 114
Index for US Tax Guide for Expats
- FinCEN Form 114 (you are here)
- Form 3520/Substitute 3520-A
- Form 5471
- Form 8621
- Form 8858
- Form 8865
- Form 8938
- Form 8992
- Delinquent Filing Procedures
FinCEN Form 114 (Formerly TD F 90-22.1), Report of Foreign Bank and Financial Accounts (FBAR)
The obligation to report foreign bank and financial accounts to the US Treasury was initially imposed by the Bank Secrecy Act in 1970. Here are the Instructions to Form 114. You can electronically file Form 114 for free here.
The law requires each "United States person" who has a financial interest in or signature authority over any foreign financial account to file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.
What Is a Financial Interest?
According to the FBAR instructions:
A United States person has a financial interest in a foreign financial account for which:
- the United States person is the owner of record or holder of legal title, regardless of
whether the account is maintained for the benefit of the United States person or for the
benefit of another person; or
- the owner of record or holder of legal title is one of the following:
- An agent, nominee, attorney, or a person acting in some other capacity on behalf of the United States person with respect to the account;
- A corporation in which the United States person owns directly or indirectly: (i) more than 50 percent of the total value of shares of stock or (ii) more than 50 percent of the voting power of all shares of stock;
- A partnership in which the United States person owns directly or indirectly: (i) an interest in more than 50 percent of the partnership's profits (e.g., distributive share of partnership income taking into account any special allocation agreement) or (ii) an interest in more than 50 percent of the partnership capital;
- A trust of which the United States person: (i) is the trust grantor and (ii) has an ownership interest in the trust for United States federal tax purposes. See 26 U.S.C. sections 671-679 to determine if a grantor has an ownership interest in a trust;
- A trust in which the United States person has a greater than 50 percent present beneficial interest in the assets or income of the trust for the calendar year; or
- Any other entity in which the United States person owns directly or indirectly more than 50 percent of the voting power, total value of equity interest or assets, or interest in profits.
When the term "indirectly" is used to describe the ownership of corporate stock, a partnership interest, and any other entity, it opens up a whole new world of attribution rules. Different rules apply to different entities and it gets messy trying to figure out your deemed (indirect) ownership when people related to you or entities you own have direct ownership. We won't delve into that here. Just know that it's difficult to avoid the reporting requirements by passing legal title of foreign accounts to someone else.
What Is Signature Authority?
Signature authority is generally the authority of an individual (alone or in conjunction with another individual) to control the disposition of assets held in a foreign financial account by direct communication (whether in writing or otherwise) to the bank or other financial institution that maintains the financial account. There are exceptions though. According to the instructions:
Individuals who have signature authority over, but no financial interest in, a foreign financial account are not required to report the account in the following situations:
- An officer or employee of a bank that is examined by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, or the National Credit Union Administration is not required to report signature authority over a foreign financial account owned or maintained by the bank.
- An officer or employee of a financial institution that is registered with and examined by the Securities and Exchange Commission or Commodity Futures Trading Commission is not required to report signature authority over a foreign financial account owned or maintained by the financial institution.
- An officer or employee of an Authorized Service Provider is not required to report signature authority over a foreign financial account that is owned or maintained by an investment company that is registered with the Securities and Exchange Commission. Authorized Service Provider means an entity that is registered with and examined by the Securities and Exchange Commission and provides services to an investment company registered under the Investment Company Act of 1940.
- An officer or employee of an entity that has a class of equity securities listed (or American depository receipts listed) on any United States national securities exchange is not required to report signature authority over a foreign financial account of such entity.
- An officer or employee of a United States subsidiary is not required to report signature authority over a foreign financial account of the subsidiary if its United States parent has a class of equity securities listed on any United States national securities exchange and the subsidiary is included in a consolidated FBAR report of the United States parent.
- An officer or employee of an entity that has a class of equity securities registered (or American depository receipts in respect of equity securities registered) under section 12(g) of the Securities Exchange Act is not required to report signature authority over a foreign financial account of such entity.
Who Is a United States Person?
A United States person (defined in IRC Sec. 7701(a)(30)) includes any citizen or permanent resident of the United States (regardless of where they live) and any foreign national who has passed the substantial presence test (see Your Residency Status).
It also includes a nonresident alien making the first year election under Section 7701(b)(4) of the Internal Revenue Code (IRC), but does not include a nonresident alien electing to file a joint return under IRC Section 6013(g) or (h) (as clarified in the Preamble to 31 CFR 1010.350, published Feb. 24, 2011, and in Section 126.96.36.199.1.2 of the Internal Revenue Manual).
A United States person also includes a corporation, partnership, limited liability company (LLC), trust, and estate, created or organized in the United States or under the laws of the United States. (IRC Section 7701(a)(30).) This is the same definition for all the forms described in this guide, except when exceptions are noted.
That means a single member LLC, even if owned by a nonresident alien, is considered a United States person for determining FBAR filing requirements, even though it is a disregarded entity for income tax purposes. According the the instructions:
The federal tax treatment of an entity does not determine whether the entity has an FBAR filing requirement. For example, an entity that is disregarded for purposes of Title 26 of the United States Code must file an FBAR, if otherwise required to do so. Similarly, a trust for which the trust income, deductions, or credits are taken into account by another person for purposes of Title 26 of the United States Code must file an FBAR, if otherwise required to do so.
Therefore, if you are a nonresident who owns a single member LLC, and the LLC either has a financial interest in foreign accounts, or signature authority over them, your LLC might have an FBAR filing requirement.
What Must Be Reported?
The term "financial account" includes the following:
- Bank accounts such as savings accounts, checking accounts, and time deposits,
- Securities accounts such as brokerage accounts and securities derivatives or other financial instruments accounts,
- Commodity futures or other options accounts,
- Insurance policies with a cash value (such as a whole life insurance policy),
- Mutual funds or similar pooled funds,
- Most retirement accounts, and
- Any other accounts maintained in a foreign financial institution or with a person performing the services of a financial institution.
For example, a Canadian Registered Retirement Savings Plan (RRSP), Canadian Tax-Free Savings Account (TFSA), Mexican individual retirement accounts (Fondos para el Retiro) and Mexican Administradoras de Fondos para el Retiro (AFORE) are foreign financial accounts reportable on the FBAR.
- Here is the information you will need to report for each account (even those valued at less than $10,000) for each year.
- Name and address of financial institution
- Type of account (bank, securities, other)
- Account number, and
- Highest balance during the year
When To File
As mandated by the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, the annual due date for filing FBARs is April 15th. The Act also mandated a maximum six-month extension of the filing deadline. FinCEN will grant filers failing to meet the FBAR annual due date of April 15th an automatic extension to October 15th each year. That means it is not required to file a form to extend the due date, making the effective due date of the form October 15.
What Happens If You Don't File FinCEN Form 114?
For over three decades after enactment, enforcement of this requirement was largely ignored by the US Treasury. Since the majority of taxpayers were not even aware of the filing requirement, noncompliance was the norm.* In 2004, the IRS was granted a very big stick when penalties for willful failure to annually file the FBAR form were dramatically increased.
Under 31 U.S.C. section 5321(a)(5), the civil penalty for a non-willful failure to report is $10,000 per violation, as adjusted for inflation. The civil penalty for a willful violation is the greater of $100,000, as adjusted for inflation, or 50% of the amount in the account at the time of the violation.
For penalties assessed after January 15, 2017, the inflation-adjusted penalty for a non-willful failure to report increased to $12,921, and the inflation adjusted penalty for a willful failure to report increased to $129,210 (31 CFR section 1010.821).
Willful violations may also be subject to criminal penalties under 31 U.S.C. section 5322 or 18 U.S.C. section 1001. These penalties are subject to a reasonable cause exception. This exception is discussed below under Delinquent International Information Return Submission Procedures.
*A Report to Congress In Accordance With Sec. 361(b) of the USA Patriot Act, Submitted by the Secretary of the Treasury, April 26, 2002.