An estimated 9 million Americans live abroad and a large percentage establish bank accounts in their new home country.
In the case of American retirees living outside the country, many even have their social security payments deposited directly into foreign accounts. Just how many people do this might surprise you.
According to statistical data provided by the U.S. Social Security Administration, just in the month of May of this year, 1,425,218 social security payments were made to beneficiaries outside of the United States. Of that amount, 63,350 of those payments were sent to accounts in Mexico.
What many Americans living abroad don’t realize is that they are required to complete an annual report to the U.S. Government if the value of their foreign accounts exceeds $10,000 USD at any time during the calendar year (the Bank Secrecy Act of 1970). This report is entirely separate from your income tax return.
The report is called the Report of Foreign Bank and Financial Accounts (FBAR) and is submitted annually to the Financial Crimes Enforcement Network (FinCEN).
Who has to file?
A “United States person” that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.
A “United States person” is defined as United States citizens (including minor children); United States residents; entities, including but not limited to, corporations, partnerships, or limited liability.
However, according to the IRS website, you do not need to file if the foreign financial accounts are:
- Correspondent/Nostro accounts,
- Owned by a governmental entity,
- Owned by an international financial institution,
- Maintained on a United States military banking facility,
- Held in an individual retirement account (IRA) you own or are beneficiary of,
- Held in a retirement plan of which you’re a participant or beneficiary, or
- Part of a trust of which you’re a beneficiary, if a U.S. person (trust, trustee of the trust or agent of the trust) files an FBAR reporting these accounts.
What about people with dual citizenship?
This applies to people with dual citizenship as well.
Even if you do not reside in the U.S. but you’re a U.S. citizen and you have foreign financial accounts, you could face penalties for not completing the FBAR if the value of those foreign accounts exceeded $10,000 USD at anytime during the previous calendar year.
Is this limited to my bank accounts?
No. The rule applies to all of your foreign financial accounts, which includes, but is not limited to the following:
Securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution (or other person performing the services of a financial institution). A financial account also includes a commodity futures or options account, an insurance policy with a cash value (such as a whole life insurance policy), an annuity policy with a cash value, and shares in a mutual fund or similar pooled fund (i.e., a fund that is available to the general public with a regular net asset value determination and regular redemptions).*
* Taken directly from BSA Electronic Filing Requirements For Report of Foreign Bank and Financial Accounts (FinCEN Form 114)
How do I file?
All filing is done electronically via FinCEN’s portal: click HERE
The instructions and requirements are available in PDF form via this link: FinCEN Form 114
What is the due date to file?
The annual due date to file the FBAR is April 15th. If you fail to make the date, don’t worry — you get an automatic extension to October 15.
What are the penalties for not filing?
For violations occurring before August 1, 2016:
Non-willful violations: subject to a civil penalty of $10,000 per violation
Willful violations: subject to a civil penalty of $100,000 or 50 percent of the balance in the account, whichever is greater, at the time of the violation
You may also be subject to criminal penalties under 31 U.S.C. section 5322(a), 31 U.S.C. section 5322(b), or 18 U.S.C. section 1001.
For violations occurring on or after August 1, 2016:
Non-willful violations: subject to a civil penalty of $12,921 per violation
Willful violations: subject to a civil penalty of $129,210 or 50 percent of the balance in the account at the time of the violation, whichever is greater. The criminal penalties still apply.
Don’t forget to keep records.
You must keep records for each account you must report on an FBAR that establish:
- Name on the account,
- Account number,
- Name and address of the foreign bank,
- Type of account, and
- Maximum value during the year.
The law doesn’t specify the type of document to keep with this information; it can be bank statements or a copy of a filed FBAR, for example, if they have all the information.
You must keep these records for five years from the due date of the FBAR.
Let’s wrap this up
In 2010, the United States enacted a piece of legislation called the Foreign Account Tax Compliance Act (FATCA) which requires foreign financial Institutions to report on the assets held by their U.S. account holders. This law has made it easier for the U.S. government to discover foreign accounts and sanction people who fail to complete their FBAR.
That basically means that if you fail to file this mandatory report, there’s a good chance that Uncle Sam will find out about it eventually and come calling.