June 7, 2012
As the US cracks down on foreign bank and financial accounts, it only means one thing for Indian Americans – more reporting! If you thought you were done with this year's reporting when you filed your tax returns in April, you probably forgot about the FBAR – Foreign Bank and Financial Account Report.
June 7, 2012
As the US cracks down on foreign bank and financial accounts, it only means one thing for Indian Americans – more reporting! If you thought you were done with this year's reporting when you filed your tax returns in April, you probably forgot about the FBAR – Foreign Bank and Financial Account Report.
The FBAR is a report to be filed in addition to your tax return. For 2011, you must file the FBAR if you were a US resident or citizen and had, at any time in 2011, an aggregate balance of more than $10,000 in all your overseas bank and financial accounts. The due date for the 2011 FBAR is June 30th 2012.
In today's article, we look at 10 key points about the FBAR, including some important practical interpretations of the law.
FBAR is different from your tax return
The FBAR is filed in addition to your income tax return. The FBAR must be filed in Form TD F 90-22.1 even if you have already filed Form 8938, 'Statement of Specified Foreign Financial Assets' along with the tax return.
The historical roots of the FBAR are found in the Bank Secrecy Act of 1970 and the intention then was only to collect information on foreign bank accounts. Only recently the US Treasury handed over administration of the FBAR to the IRS which in turn started linking the FBAR to the tax return to check tax evasion.
While Form 8938 and the FBAR require more or less the similar kinds of details, there are some differences in thresholds and type of assets. You can get a complete comparison here.
FBAR is due on 30th June
The last date for submission of the FBAR is 30th June. Unlike the tax return that must be post marked April 15th, the FBAR must be received by the Treasury by the 30th of June. No extensions are available.
"So if you complete your FBAR on June 29th, you will have to send it via overnight mail so that it reaches by June 30th. If you complete it on June 30th it will be late," says Vinay Navani, a CPA and director of tax at New Jersey based firm Wilkin & Guttenplan, P.C
Even if no income, you must report
If you hold a foreign financial account, you may have a reporting obligation even though the account produces no taxable income.
Even a single day's high balance counts
The FBAR must be filed by US residents, green card holders and citizens if the aggregate of their bank and financial accounts exceeded $10,000 at any time during 2011.
This means that if the aggregate of your accounts exceeded $10,000 even on a single day in 2011, you would have to file the FBAR and disclose all the individual accounts.
"Sometimes it may seem like you have to report more assets than you actually have, especially when you transfer funds between accounts. Make the appropriate reporting and don't worry too much because there are no real tax implications from the FBAR if you have reported income from these assets on your tax return," Navani adds.
The FBAR regulations say that you must have either signature authority or financial interest in these accounts. We'll discuss these two in the following points.
Signature authority
You must either have a signature authority OR financial interest in the foreign bank or financial account, for that account to qualify as 'your' account under FBAR.
The important thing to remember is that it is either signature authority or financial interest. You may have signature authority on an account with no financial interest. For instance, a CFO of a company may have signature authority over the company's bank account.
In such cases, Navani explains, "If a US company has a foreign bank account and the US CFO is the only person who is an authorized signatory, then both the company will file an FBAR (signed by a corporate officer – maybe the CFO). In addition, the CFO will file a personal FBAR and report the account as one which he or she doesn't have a financial interest in but does have signature authority."
There are some exceptions. Individuals who have signature authority over, but no financial interest in, a foreign financial account are not required to report the account in certain situations. Employees of publically traded companies who only have signature authority over foreign bank accounts are usually exempt from FBAR.
You can read the complete list of exceptions in the instructions to the FBAR.
Financial interest
You must file the FBAR even if you have financial interest without signature authority. "An important example here would be if a US person owns more than 50% of an Indian Pvt. Ltd., then he or she must file an FBAR since he or she has a financial interest in the bank accounts maintained by the Indian Pvt. Ltd," Navani explains.
Broadly, you are deemed to have financial interest if you are the owner of record or holder of title in an asset, corporation, trust or other similar structure. This interest can be direct or indirect, such as through an agent or power of attorney. A complete definition of 'financial interest' is available in the instructions to the FBAR.
Treatment of joint accounts, power of attorney accounts etc
There can be several possibilities when it comes to account holding. You could either be a single owner or joint owner. The person with whom you hold a joint account (spouse, parents) may be a US person or a non US person. In case you hold a joint foreign account with your parents who are in India, then you must file the FBAR if all other conditions are met. In case of filing FBAR with the spouse, there could be several scenarios.
If you are a US person and your spouse is a non US person, you need to file your FBAR but your spouse need not. If both, you and your spouse are US persons, there is a certain exception.
The spouse of an individual who files an FBAR is not required to file a separate FBAR if the following conditions are met: (1) all the financial accounts that the non-filing spouse is required to report are jointly owned with the filing spouse; (2) the filing spouse reports the jointly owned accounts on a timely filed FBAR; and (3) both spouses sign the FBAR in Item 44. See Explanations for Specific Items, Part III, Items 25-33. Otherwise, both spouses are required to file separate FBARs, and each spouse must report the entire value of the jointly owned accounts.
A nominee, attorney, or agent of an individual holding a foreign account also has a filing responsibility. So if you hold the power of attorney over a foreign account, you must file your FBAR.
Suppose you hold an account in India and your father holds the power of attorney for that account, in such cases too, you must file your FBAR.
Treatment of financial accounts like Hedge funds, PE funds, Mutual Funds, Provident Funds
The definition of foreign bank and financial account includes a host of accounts, apart from the bank account. This includes: *Savings account, bank fixed deposit account *Brokerage and securities account *Commodity futures or options account *Insurance policy with cash surrender value *Annuities cash value *Mutual funds
In the case of brokerage account, commodities account and mutual funds, the market value of your securities must be taken.
In the case of an insurance policy like an endowment policy, the cash surrender value would be taken into account. The insurance company will be able to help you arrive at the value. In the case of an annuity, again, the cash value would have to be taken.
In case of provident funds, Navani advices, "Report it on the FBAR but indicate on line 16 that it is an 'other account' and write in 'retirement'."
If the aggregate of all these balances exceeds USD 10000 during the year, you would need to file the FBAR. For exchange rate conversion, you would need to use the Treasury's Financial Management Service rate (this rate may be found at www.fms.treas.gov) from the last day of the calendar year. If no Treasury Financial Management Service rate is available, use another verifiable exchange rate and provide the source of that rate.
Failure to file FBAR attracts penalties
Willful failures can be subject to civil penalties of up to the greater of USD 100,000 or 50% of the account balance and/or criminal penalty of up to USD 250,000 and/ or 5 years imprisonment. This penalty can be applied for each year an FBAR is willfully not filed. The IRS can also go back 6 years and check your tax returns to trace the balances reflecting in the FBAR.
Non-willful failures can be subject to a penalty of USD 10,000 per year for each year an FBAR is not filed, also going back 6 years. This penalty can be waived if reasonable cause is shown for the failure to file.
Forgot to answer relevant question on Form 1040?
Schedule B of your income tax return, form 1040, asks: At any time during 2011, did you have a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country? If 'Yes,' are you required to file Form TD F 90-22.1 to report that financial interest or signature authority?
You may have answered this question as a 'No' at the time of filing your tax return but realize now that you indeed have foreign financial accounts that require an FBAR filing. If it is an isolated, inadvertent error of not checking the box 'yes', but the income was reported, consider amending Form 1040, Sch. B to answer the question correctly. If the incorrect answer is related to more substantial under reporting of income, you may want to consult a tax professional to discuss your options.
Courtesy: TOI
