The U.S. Expat's Tax Trap: FBAR

Report of Foreign Bank and Financial Accounts, commonly known as FBAR, has been around for over 50 years now and is no longer obscure for those with foreign financial accounts who file U.S. tax returns each year. But their finer points still trap unwary taxpayers. In fact, FBAR’s apparent simplicity is almost deceitful, as innocent mistakes on FBAR mistakes can lead to disastrous results.

Report of Foreign Bank and Financial Accounts (“FBAR”)

In 1970, Congress passed the Currency and Foreign Transactions Reporting Act, commonly known as the Bank Secrecy Act (“BSA”). The BSA authorizes the Department of the Treasury to impose reporting and other obligations on financial institutions and businesses to detect and prevent money laundering.

1. Not an Income Tax Reporting

As mentioned above, the governing law for FBAR is the Bank Secrecy Act. The BSA is a key anti-money laundering (AML) statute in the U.S. law, but is a separate legal framework from the Internal Revenue Code (IRC). The IRC provides detailed tax rules on income, deductions, and credits as well as related procedures, tax calculations, penalties and available tax reliefs.

The BSA is administered by Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. As such, FBAR is reported to FinCEN, rather than the IRS.

2. The USD 10,000 Aggregate Trap

FBAR reporting threshold is the combined value of all foreign (non-US) accounts, not individual accounts. A single day above USD 10,000 across multiple accounts triggers filing requirements.

For example, if you have USD 5,000 in a foreign savings account + USD 5,000 in a foreign investment account + USD 1 in another foreign account on any given day during the year, all three accounts must be reported on that year’s FBAR.

Small accounts are not exempt. Fleeting balance spikes (from temporary deposits, transfers, etc) must be included when reviewing for filing requirements.

3. Signature Authority Surprises

If you have control over a foreign account, you still need to report even if you don’t own it. I once met with a corporate officer who was a signatory on multiple corporate accounts outside the U.S. This officer was a U.S. expat and had to file multiple years of missed FBARs.

Executives, trustees or Power of Attorney holders often overlook this. It is not just the direct ownership that counts towards the FBAR requirements.

However, a trust beneficiary is not required to report the trust's foreign financial accounts on an FBAR if the trust, trustee of the trust, or agent of the trust: (1) is a United States person and (2) files an FBAR disclosing the trust's foreign financial accounts.

4. Minor Child Responsible for FBAR, Too

Minor children usually do not have to file their own income tax return. However, a minor child whose foreign bank or financial accounts exceed the filing threshold, that child is responsible for his or her own FBAR report. If a child cannot file his or her own FBAR for any reason, such as age, the child's parent, guardian, or other legally responsible person must file it for the child.

5. Joint Accounts & Spousal Reporting

Joint accounts with a non-U.S. citizen spouse still require FBAR filing by the U.S. person, if filing requirements are met. Unless certain conditions are met, both spouses who are U.S. persons must file separate FBARs and report the entire value of the jointly owned accounts.

6. Cryptocurrency Confusion

The current FBAR regulations do not define a foreign account holding virtual currency (cryptocurrency) as a type of reportable account. But foreign exchange accounts may be included in the current reporting requirements. Furthermore, FinCEN has announced that it intends to propose to amend the regulations to include virtual currency as a type of reportable account.

7. FBAR & FATCA, hand-in-hand?

FATCA stands for the Foreign Account Tax Compliance Act . It's a U.S. federal law enacted in 2010. FATCA requires non-U.S. financial institutions (like banks, investment funds, certain insurance companies, etc.) worldwide to identify U.S. account holders and report information to the IRS. It also requires U.S. taxpayers with specified foreign financials assets to report such assets on Form 8938, Statement of Specified Foreign Financial Assets.

FATCA (Form 8938) has higher filing thresholds but covers broader assets than FBAR. Some taxpayers file FBAR but overlook FATCA, not realizing they exceed Form 8938 thresholds. FATCA is part of an income tax return, and the initial penalty for noncompliance is $10,000, plus 40% underpayment penalties if taxes are owed on undisclosed specified foreign financial assets.

All accounts reported on FBAR also need to be reviewed for FATCA applicability, or vice versa.

8. “Willful” vs. “Non-Willful” Penalties

FBAR penalties vary. For non-willful FBAR violations, the maximum civil penalty is $10,000 per violation (per year) - which is adjusted for inflation. For willful FBAR violations, the maximum civil penalty is $100,000 (also adjusted to inflation) or 50% of the account balance, whichever is greater. Additionally, criminal penalties may be assessed up to $250,000 plus imprisonment up to five years.

For FBAR purposes, "willful" conduct encompasses both knowing and reckless violations. Willfulness in the civil FBAR context does not require actual knowledge of the filing requirement. Instead, it can be established through reckless disregard, constructive knowledge, or willful blindness. Evidence of willfulness can include actions such as failing to answer questions about foreign accounts on tax returns, omitting accounts from an FBAR, or ignoring clear instructions regarding the filing requirement.

Such stiff penalties have been argued in numerous cases, many of them ruled against taxpayers. In one of the recent cases - U.S. v. Schwarzbaum - the taxpayer is a wealthy U.S. citizen who held foreign bank accounts in Switzerland and Costa Rica but failed to report them to the IRS for tax years 2007-2009. The IRS assessed FBAR penalties totaling over $13million for willful failure of FBAR reporting. While the court found part of the penalties were excessive, the ruling was that most of the penalties were not grossly disproportionate given the willful failure of FBAR reporting.

** This article (the "Content") is provided for informational purposes only and does not constitute tax or legal advice. The author disclaims all liability for actions taken based on this content. While every effort is made to ensure accuracy, readers assume full responsibility for their use of this information. Please seek professional advice from a qualified attorney, accountant, or tax professional licensed in your jurisdiction**