LB&I Practice Unit for FBAR (A FinCEN 114 Overview)

LB&I Practice Unit for FBAR (A FinCEN 114 Overview)

LB&I Practice Unit for FBAR (A FinCEN 114 Overview)  

Several times a year, the Internal Revenue Service publishes Practice Units to assist IRS staff with understanding the application of rules, exceptions, and exclusions involving different tax and reporting requirements. They provide helpful examples as well — taxpayers can also access these Practice Units. Recently, Golding & Golding published a comprehensive summary of the FBAR practice unit – but we also realize that the material can be overwhelming (and boring) for most taxpayers. Therefore, we created a key point summary for the Large Business & International Divisions’ Practice Unit for FBAR (FinCEN Form 114) as we prepare for 2023 — and another round of FBAR reporting for 2022 account balances.

Who Must File the FBAR?

In general, US Persons with foreign bank and financial accounts that exceed the threshold requirements for reporting must file the annual FBAR. Currently, the threshold is if the total aggregate amount of all accounts combined is over $10,000 in total (not per account). It is important to note that the term “US person” is not limited to US individuals and can also include US entities such as corporations, partnerships, and trusts. It is also very important to note that even if a US person makes a treaty election to be treated as a foreign person, it does not impact the requirement for them to file an FBAR — because the taxpayer is still considered a US person.

What Is the Purpose of the FBAR?

While most people will tell you the purpose of the FBAR is simply to harass and annoy taxpayers (and that might be the resulting impact), the FBAR is designed to protect the US and prevent people from circumventing the law. In other words, if a person uses their foreign financial accounts to fund foreign wars, terrorists, drug cartels, and other illicit activities, then the US government wants the opportunity to track that money and prevent these bad actions from happening or continuing. Still, we do agree that the application of the FBAR can be very unfair and overburdensome, especially to taxpayers in countries that have a banking system that is not compatible with the United States.

What Is a Financial Account?

There is a general misconception that the FBAR is limited to bank accounts, but that is incorrect. In addition to bank accounts, there are many other types of foreign accounts that need to be reported as part of the FBAR, including securities accounts, mutual funds, ETFs, other pooled funds, and certain insurance or annuity policies.

When Is the FBAR Due?

The FBAR is due on April 15. But, for the past several years the filing of the FBAR has been on automatic extension until October 15th. That means that taxpayers have until October 15 of each year to file the FBAR — without having to file an extension form such as an IRS Form 4868 or 7004.

What Is the Statute of Limitations for FBAR Violations?

When it comes to FBAR filing violations, the date of the transaction is the due date for filing the FBAR. The statute of limitations for assessing a civil FBAR penalty is six years from the date of the transaction. This is why the Streamlined Procedures and the Voluntary Disclosure Program require six years of FBAR filing (although the latter used to require eight years under the prior version of OVDP).

Current Year vs. Prior Year Non-Compliance

Once a taxpayer misses the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs. Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain Streamlined Procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead of the Streamlined Procedures. But, if a willful taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. Thus, it is truly important to identify whether the taxpayer falls under “willful” vs. “non-willful” prior to submitting to any of the IRS programs.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure

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