As the April 15 tax filing deadline approaches, U.S. persons with foreign financial accounts must be aware of their obligation to file the Report of Foreign Bank and Financial Accounts, commonly called the “FBAR”. The filing deadline is April 15, the same due date as one’s U.S. income tax return, but there is an automatic extension to October 15 if the initial FBAR deadline is missed. No separate extension request is required. For tax year 2024, the FBAR must be filed by April 15, 2025, with the automatic extension pushing the final due date to October 15, 2025.
Importance of Accurately Answering Schedule B
U.S. taxpayers must answer the foreign account question on Schedule B, Part III of their Form 1040 tax return, even if no separate Schedule B is required for other reasons (such as receipt of dividends or interest). Taxpayers may be filing their U.S. income tax returns by April 15 and not giving full thought to the need to file an FBAR, given its automatic extended due date.
Nonetheless, accurately answering the foreign account question on Schedule B is critical, as it can have significant legal consequences. This question puts a taxpayer on notice as to the possible duty to file an FBAR.
A taxpayer who fails to disclose a foreign financial account by incorrectly answering “no” on Schedule B’s check-the-box question may be at risk of being found willful in their failure to file an FBAR.
The distinction between willful and non-willful noncompliance is crucial because willful violations carry substantially higher penalties and potential criminal liability. An inaccurate response on Schedule B can be used as evidence of willfulness, making it essential for taxpayers to answer truthfully and carefully.
FBAR Nutshell Review
Some taxpayers mistakenly assume that FBAR filing applies only to individuals who hold foreign bank accounts in their own name. However, the FBAR requirements are broad and cover far more than bank accounts and direct ownership situations.
U.S. person must file an FBAR if they have “a financial interest in or signature authority over” one or more foreign financial accounts and if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year. Understanding financial interest and signature authority is key to determining whether a filing obligation exists.
FBAR Financial Interest In A Foreign Financial Account
A financial interest in a foreign account can arise in multiple ways. The most straightforward case is when a U.S. person is the owner of the account, either individually or jointly. In the case of nominees, a U.S. nominee holding a foreign account for another person will have FBAR obligations since title to the account is in the name of the U.S. nominee regardless of the fact the nominee has no beneficial interest in the account. Additionally, a financial interest may exist when an account is held by a nominee or agent who is acting on behalf of a U.S. person. Even though the U.S. individual is not the legal account holder, FBAR duties may arise since the account is being held on his or her behalf.
Account ownership is not the only basis for FBAR reporting. A financial interest in a foreign account can arise by indirect ownership including when a taxpayer owns more than 50% (by vote or value) of a corporation, partnership, or other entity that itself holds a foreign account. For instance, if a U.S. taxpayer owns 60% of a foreign corporation, they are treated as having a financial interest in all of that corporation’s foreign accounts, even if the accounts are not in their name. By contrast, a U.S. person who owns only 30% of a partnership does not have a financial interest in the partnership’s accounts for FBAR purposes.
Trust Relationships And FBAR Obligations
FBAR complexities multiply when trusts are holding foreign accounts. Trust relationships create potential reporting obligations for the various parties involved with the trust – the trust creator, the trustee, and the trust beneficiaries.
A U.S. trustee would invariably have FBAR duties with respect to the trust’s foreign accounts, whether based on having a financial interest or signature authority over the accounts.
A U.S. person who is the grantor of a trust and retains an interest in its assets has a financial interest in the trust’s foreign accounts raising FBAR obligations. Similarly, absent a narrow exception, FBAR duties arise for a U.S. beneficiary who has a greater than 50 percent present beneficial interest in the assets or income of the trust for the calendar year. Since FBAR is an annual form, careful monitoring is especially important when U.S. beneficiaries receive trust distributions. For example, if a beneficiary receives 60% of the trust income in the year in question, the beneficiary would have a financial interest in the trust’s foreign accounts for FBAR purposes for that particular year.
FBAR Signature Authority Over A Foreign Financial Account
Separate from financial interest, signature authority over a foreign financial account can also trigger FBAR filing. A U.S. person has signature authority if they have the power—alone or jointly with others—to control the disposition of account funds through direct communication with the financial institution.
This type of authority would typically apply to corporate officers with control over company accounts, employees authorized to approve account transactions, and individuals who hold online banking credentials that allow them to execute transactions. While the individual may not own the account or otherwise have a direct financial interest, simply having the power to control transactions online with a login and password can be enough to trigger an FBAR reporting requirement.
Having a power of attorney over financial transactions that involve foreign accounts might also give the power holder FBAR signature authority. When a POA is granted with respect to financial transactions, it typically provides the holder with the authority to control the disposition of assets held in a financial account. Even if the authority is never exercised, FBAR filing would be required assuming the $10,000 threshold was met.
Conclusion
Many U.S. taxpayers overlook FBAR filing, often under the mistaken belief that they are exempt because they do not personally hold a foreign account. However, indirect ownership and signature authority can create an FBAR obligation. Tax season is here. Taxpayers should review their foreign account holdings to ensure they accurately answer the foreign account question on Form 1040, Schedule B and file FBARs to avoid potential penalties.
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This communication is for general informational purposes only. It is not intended to constitute tax advice or a recommended course of action. Professional tax advice should be sought as the information here is not intended to be, and should not be, relied upon by the reader in making a decision.
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