Do You Maintain an Interest in a Foreign Financial Account?

Financial Interest in “FBAR” Foreign Accounts: Golding & Golding

Interest in a Foreign Financial Account

One of the most complicated aspects of filing the annual FBAR, is that it is not limited to taxpayers who have ownership of a foreign financial account. In fact, the FBAR (used to Report Foreign Bank and Financial Accounts) can also be required for taxpayers from merely have a signature or other authority over a foreign account –– such as, for example having ownership over an account owned by a parent or relative — or an employee who may have signature authority over corporate accounts. The reason why the financial interest aspect is so important is that when a person has a financial interest in a foreign account, that tends to be when the IRS punishes them for noncompliance. But, just because a person may have their name on a foreign account does not mean that they actually have a financial interest in that account. Let’s look at some of the common examples provided by the Internal Revenue Service as to what constitutes a financial interest in a foreign account.

Financial Interest Defined

As provided by the IRS:

 A U.S. person has a financial interest in the following situations:

• • • The U.S. person is the owner of record or holder of legal title, regardless of whether the account is maintained for benefit of the U.S. person or fo 4 the benefit of another person, including non-U.S. persons.

    • The owner of record or holder of legal title is a person acting as an agent, nominee, attorney, or a person acting on behalf of the U.S. person with respect to the account.

      • • Example: John is a U.S. citizen. His brother Paul maintains bank accounts in Mexico on behalf of John. The accounts are held in Paul’s name, but Paul only accesses the accounts following his brother’s instructions. John has a financial interest in the Mexican bank accounts for FBAR reporting purposes. If his brother Paul is a U.S. citizen or resident, Paul must also report the accounts on an FBAR.

    • The owner of record or holder of legal title is a corporation in which a U.S. person owns directly or indirectly:

      • more than 50% of the total value of shares of stock, or

      • more than 50% of the voting power of all shares of stock.

        • Example: A Florida corporation that owns 100% of a Spanish company with foreign financial accounts must file an FBAR because the corporation is a U.S. person that directly owns more than 50% of the total value of the shares of stock of the Spanish company, the owner of record or holder of legal title.

        • Example: A U.S. person who owns 75% of the Florida corporation in the previous example must file an FBAR because they indirectly own more than 50% of the total value of shares of stock of the foreign corporation that owns foreign financial accounts.

    • The owner of record or holder of legal title is a partnership in which the U.S. person owns directly or indirectly:

      • an interest in more than 50% of the partnership’s profits (distributive share of partnership income taking into account any special allocation agreement), or ▪ more than 50% of the partnership capital.

    • The owner of record or holder of legal title is a trust of which the U.S. person is the trust grantor and has an ownership interest in the trust for U.S. federal tax purposes. See 26 USC Sections 671- 679 to determine if a grantor has an ownership interest in a trust.

      • • Example: Diana, a U.S. citizen, is a grantor of a Foreign Asset Protection Trust but neither controls trust assets nor receives distributions from the trust. Diana, as grantor and considered owner of trust assets for federal tax purposes, must report the trust’s foreign financial accounts on an FBAR

    • The owner of record or holder of legal title is a trust in which the U.S. person has a present beneficial interest, either directly or indirectly, in more than 50% of the assets of the trust or from which such person receives more than 50% of the trust’s current income for the calendar year.

      • • Example: Amy, a U.S. citizen, has only a remainder interest in a trust with a foreign financial account. Amy doesn’t need to report the trust’s foreign financial account because a remainder interest isn’t considered a present beneficial interest for FBAR purposes.

    • The owner of record or holder of legal title is any other entity in which the U.S. person owns directly or indirectly more than 50% of the voting power, total value of equity interest or assets, or interest in profits.

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