Friday, March 15, 2013

FBAR: Foreign Bank (and Financial) Account Reporting Rules Expanded With Higher Penalties

The U.S. Treasury issued expanded rules, effective March 28, 2011, requiring U.S. persons to report foreign bank and financial accounts each year. The new rules apply to every U.S. citizen or resident and every entity organized under U.S. law. They must report every foreign account over which he, she, or it has signature authority and every foreign account in which he, she, or it has a financial interest. The reports on Form TD F 90-22.1 must be received by June 30 by the IRS at an address in Detroit, MI. Penalties under the new rules can be the highest balance in the account, up to $25,000 each, and may include criminal penalties (jail time) for willful failures.

Who Must File. The reports must be filed by every U.S. person with a financial interest in or signature authority over a foreign financial account. This includes all citizens and residents of the United States. It also includes all entities formed under the laws of the United States. For this purpose, United States includes the 50 states, District of Columbia, Puerto Rico, the Virgin Islands, and other territories and possessions. The rules require reports by corporations, partnerships, limited liability companies, and other entities, no matter who owns them, if they were formed under U.S. law. In addition, U.S. persons (individuals or entities) that own more than 50% of the vote, value, interest in profits, or capital of any entity with a foreign account must also file, whether the entity is U.S. or foreign.

U.S. persons must report all foreign accounts they own, either separately or jointly. They must report if they are the owner of record, or if another person is the owner of record acting as their agent. In addition, a U.S. person must report an account owned by:

    Any corporation in which the person owns over 50% of the vote or value,
    Any partnership in which the person owns over 50% of the capital or profits interests,
    Any other entity, including an LLC, in which the person owns over 50% of the vote, value, equity, assets, or profits, and
    Any trust of which the person is either the grantor or 50% or more income beneficiary.

Example: John and Mary are unrelated. John owns 51% and Mary owns 49% of JM, a Delaware LLC. JM owns 51% of a Clocks GmgH, a German company. Clocks has an operating bank account at a bank in Frankfurt and a brokerage account with a stock broker in Zurich. John and JM must both report each account. Mary can direct the brokerage to make distributions, but can't sign any checks. Mary must report the brokerage account.

In addition, a person who has signature authority over an account must report the account. Signature authority includes any ability to direct the institution. Example: Fred is a U.S. citizen living in Germany, and is the controller at Clocks. He can sign the Clocks checks, with one co-signer. Fred must report the Frankfurt account.

What Accounts Must Be Reported. Accounts with a foreign branch of any bank, brokerage, or other financial services company must be reported. All of the following must be reported:

    Checking accounts
    Savings accounts
    Brokerage accounts
    Mutual funds with regular net asset value determinations
    Life insurance policies or annuities with a face value

A few exceptions apply. A bank account maintained on a U.S. military base is not considered foreign. Accounts in Puerto Rico, Virgin Islands or other possessions are not considered foreign. Beneficiaries of IRAs do not themselves report accounts maintained by the IRA.

Examples: Jesus is a resident of Puerto Rico. He does not need to report his Puerto Rico bank account, but must report his account in Haiti.

Betty lives in Idaho. She has a whole life insurance policy with Insur AG, a Swiss insurance company. She must report that policy.

Alice lives in Texas. She owns shares of a German mutual fund held for her benefit in her family attorney's name. Alice and the attorney must both report the mutual fund.

Account Value. Reporting is required for every U.S. person who has accounts with an aggregate value in excess of $10,000 at any time during the year. The value of each account is determined by translating the face value of the account to U.S. dollars using the rate for the end of the year as published by Treasury. Where no rate is published, an alternative source may be used (but must be explained).

Example: Harry has a bank account in Elbonia denominated in Drakmas. The maximum value of the account during the year was 1,427,000 Drakmas on June 13, 2010, and nearly zero the rest of the year. Treasury did not publish rates for the Drakma, but the Elbonian Gazette listed the rate on June 13 as $1 = 150 Drakmas, and the rate on December 31 as $1 = 130 Drakma. Harry must report the account at a value of $10,977, and attach an explanation to the form about using the Gazette rate.

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