What is the Purpose of the FBAR?
The FBAR refers to Foreign Bank and Financial Account Reporting, FinCEN Form 114. The purpose of the form is primarily to ensure that US Persons (Individuals and Entities) properly report and disclose their foreign accounts, assets, investments, and income to the IRS. There are many reasons the IRS believes that this type of information is necessary. The form is designed to prevent Taxpayers from hiding assets overseas, using foreign money for illicit activities (outside of the watchful eye of the IRS), as well as to keep track of Taxpayer’s net worth – the latter making the form highly intrusive and completely unfair for US persons who may simply have some foreign accounts and who have never run afoul of the law. The failure to properly report the FBAR timely each year may result in significant fines and penalties – although the IRS has developed various tax and reporting amnesty programs to safely bring taxpayers t into compliance.
Purpose of the FBAR
As provided by the IRS:
“Purpose of the FBAR U.S. persons maintain overseas financial accounts for a variety of legitimate reasons including convenience and access. Foreign financial institutions may not be subject to the same reporting requirements as domestic financial institutions.
The FBAR is used by the U.S. government to identify persons who may be using foreign financial accounts to circumvent U.S. law. FBAR information can help identify or trace funds used for illicit purposes or identify unreported income maintained or generated abroad.”
Let’s look at some examples involving the purpose of the FBAR:
Estate Tax Purposes
While the current gift and estate tax exclusions are north of $11 million, it is not always that high. Let’s say for example that a foreign person was to pass away and leave a US person a significant amount of money in foreign accounts. If the US person was not required to report the foreign accounts then the US government would have no idea what the value of those accounts was — and when the US person passes away, their estate could escape estate tax.
The Flow of Foreign Income
Expanding upon the above example, let’s say that the US taxpayer has several million dollars in foreign accounts, which generates a significant amount of foreign income. In many foreign countries, passive income such as interest and dividends are not taxable. By requiring a US person to report their foreign accounts on the FBAR it could help the US government identify foreign income that should be included on the US tax return.
Money Laundering and Other Crimes
By requiring US persons such as domestic entities and trusts to report their ownership of foreign accounts, it could help the United States government identify sources of monies being transferred overseas (back and forth) in order to avoid detection by the US government as a form of Money Laundering or other crime.
By requiring the reporting of foreign accounts, the US government hopes it can crack down on monies being funneled for use in terrorism and/or other illicit activities.
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