Expats: Beware the FBAR Dragnet

The FBAR’s shotgun approach catches not only tax dodgers but also ordinary expats who use foreign accounts to do ordinary things like pay living expenses in the local currency. This article discusses the FBAR filing requirement so you can determine if you’ve been caught in the FBAR dragnet.

Written by Stewart Patton

The purpose of the Foreign Bank Account Report (the “FBAR”) seems clear enough—to help the IRS track down US citizens who hide assets offshore. Unfortunately, in addition to catching Americans who use offshore accounts to evade tax, the FBAR’s shotgun approach also catches ordinary expats who use foreign accounts to do things like pay living expenses in the local currency. This article discusses the FBAR filing requirement so you can determine if you’ve been caught in the FBAR dragnet.

FBAR Basics

You’re required to file the FBAR for a calendar year if (i) you’re a US person and (ii) during such calendar year, you had a financial interest in or signature authority over one or more non-US financial accounts with an aggregate maximum account value in excess of $10,000.

Just about every word in the preceding paragraph is a defined term for FBAR purposes. Let’s break down this jargon a bit:

• A “financial account” for FBAR purposes is defined very broadly. It includes any type of account you can open at a bank (checking, savings, certificate of deposit, etc.), a securities or brokerage account, and many more exotic types of accounts, such as a commodity futures or options account, an insurance policy with a cash value (such as a whole life or variable universal insurance policy), an annuity policy with a cash value, and shares in a mutual fund or similar pooled fund.

• You have a “financial interest” in an account where you own the account directly or indirectly. So, for example, you have a financial interest in an account that is in your name or in the name of a corporation you control.

• You have “signature authority” over an account when you have the authority to control the disposition of assets held in the account by direct communication to the financial institution that maintains the account. There are certain exceptions for employees at banks and other unusual situations.

• To determine the “aggregate maximum account value” of your accounts for a year, first determine the highest value of each account for the calendar year in the account’s currency. Next, if necessary, convert each such amount to US dollars using the Treasury’s Financial Management Service rate as of the last day of the year. Finally, add those US dollar amounts together. You have an FBAR filing requirement if such amount exceeds $10,000.

Penalties

The penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign account per violation. So, if you willfully fail to file the FBAR for 3 years, the IRS could impose a penalty of 150% of the account balance (or $100,000, if such amount is greater). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation. Additionally, failing to file an FBAR subjects a person to possible criminal penalties, including a prison term of up to ten years and a fine of up to $500,000.

However, if you’ve failed to file one or more FBARs, you may qualify for an IRS amnesty program. These programs allow you to get caught up and either pay a substantially reduced fine or avoid fines altogether.

Examples

Here are some examples of ordinary expats caught in the FBAR dragnet:

• Bob decides to take a beautiful Central American locale for an extended test drive, renting a house while he’s deciding whether to purchase. He keeps his retirement funds in the same accounts he’s held in the US for years, only bringing down small amounts as necessary. He then decides to purchase a home, and he opens a local bank account so he can pay the seller in the local currency. All on the same day as part of the real estate closing, Bob moves more than $10,000 from a US account to his non-US account, and then he moves it to the seller. Bob must file the FBAR because the maximum value of his non-US account exceeded $10,000, even though only momentarily and temporarily during the home purchase transaction.

• Jane just moved outside the US to fulfill her dream of living a care-free beach lifestyle. To help her pay rent and shop in the local currency, she opens a checking account at a local bank. She also opens a savings account to earn some interest on idle money. She funds the savings account through a wire transfer of $5,000 from a US bank. Later that same year, she moves the $5,000 plus interest into her checking account. Jane should file an FBAR because the aggregate maximum account value of her two accounts exceeds $10,000.

• Sally moves abroad to work for the same employer she worked for in the US. Part of Sally’s new responsibilities include overseeing money matters at the fledgling offshore branch, so Sally is able to sign checks on several accounts owned by her employer. Sally is required to file the FBAR even though she hasn’t moved a single cent of her own money offshore.

Take a minute to ask yourself—have I been caught in the FBAR dragnet?

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