Written by: David Cooper, CPA
The finance and tax law world can be complex, especially when dealing with matters of foreign financial accounts. One area that frequently raises questions is the Foreign Bank Account Report (FBAR), which is a critical piece of the puzzle for U.S. persons with financial interests overseas.
The Financial Crimes Enforcement Network (FinCEN) Form 114—the FBAR—is an annual report that U.S. persons, including citizens, residents, corporations, trusts, or estates, must file if they have a financial interest in or signature authority over foreign financial accounts exceeding $10,000 in aggregate value at any point during the calendar year. This regulation falls under the Bank Secrecy Act (BSA).
The deadline for FBAR filing is April 15 of the year following the reported calendar year. However, if you miss this deadline, you are granted an automatic extension to October 15. It’s important to note that even if you file your FBAR late, there isn’t a specific late filing penalty. However, penalties for non-filing can be severe, potentially up to 50% of the account value for willful violations or a civil penalty of $10,000 for each non-willful violation.
A question often asked is whether filing an FBAR triggers an audit. While the filing itself may not necessarily incite an audit, failing to file an FBAR could increase your audit risk.
There’s often confusion about whether U.S. citizens need to report foreign real estate on their FBARs. The answer is nuanced. While foreign real estate itself is not reported on FBAR or Form 8938, any rent derived from or a sale of the foreign real estate must be reported.
A key concern is when a non-willful violation transforms into a willful one, triggering higher penalties. The answer depends on individual circumstances, so in some instances, legal counsel may be recommended.
The implications of the BSA and FBAR regulations were recently tested in the U.S. Supreme Court case Bittner v. U.S. The case focused on a provision of the BSA, specifically around non-willful violation penalties. The court ruled 5-4 in favor of a per-report basis for penalties rather than per account. This ruling significantly reduces taxpayers’ financial risk for non-willful FBAR reporting violations, as penalties were previously inconsistently applied based on the number of accounts.
What does the recent U.S. Supreme Court ruling mean? Despite this ruling, a note of caution is advised. The Supreme Court’s decision applies only to non-willful FBAR failures. Willful violations are not subject to the per-report limit and can be penalized on a per-account basis. Furthermore, the court ruling didn’t address all areas of ambiguity, such as the level of intent required to impose a non-willful penalty or whether penalties for violations of the BSA’s record-keeping requirements are determined on a per-account basis.
The world of FBAR reporting can be complex, but compliance can be achieved with careful navigation and an understanding of the current landscape. In cases of doubt or confusion, seeking expert advice is always a prudent course of action. With this recent Supreme Court ruling, the path to compliance has become clearer, albeit with lingering questions. It’s always better to stay informed and ensure you meet your FBAR obligations fully to avoid complications down the line.