FBARs: Nul n'est censé ignorer la loi

It's that time again, folks. The United States IRS Form TDF 90-22.1 Report of Foreign Bank and Financial Accounts is due at the end of this month (June 30th).

Filing this form is mandatory for all U.S. Persons if:

The United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and
The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.

There is still a lot of confusion about this form which hardly anyone knew about until very recently.  I'm still meeting new arrivals here in Paris who have no clue that this form applies to them.  I even know some people in the U.S. who probably also owe this form to the American "fisc" but they are still living in blissful ignorance.

But guess what?  Ignorance of the law is no excuse (nul n'est censé ignorer la loi) says the U.S. government  and that argument won't necessarily get you very far in front of an U.S. IRS agent.  Are there and will there be lawsuits over this?  You bet but...

The fines for not filing this form correctly are literally enough to bankrupt the average working person or retiree:  The "non-willfulness penalty" which means that you just didn't know but you sure didn't intend to break the law is 10,000 USD per year. If it's "willful" then the IRS says here:  "For violations occurring after October 22, 2004 the ceiling is the greater of $100,000 or 50% of the balance in the account at the time of the violation."

Ouch!

Now that I have your attention I'm going to use this post today to  translate what this all means into language we can all understand:  Who has to file this form, what information is required, and when it's due.  For the moment we'll skip the "Why" which merits its own post.  Please bear in mind that I am not a lawyer or an accountant or a tax expert.  Feel completely free to correct me if you see anything that you think is unclear or incorrect.

Who Has to File this Form?  

This form is to be filed by all "U.S. Persons" with at least one account in a bank or financial institution outside the U.S.  What does that mean?  Some people think it means U.S. citizens and others think it means companies (as in "Corporations are people, too!")

That is only partially correct.  Here is the definition of the term from the IRS website:

A U.S. Person "means United States citizens; United States residents; entities, including but not limited to, corporations, partnerships, or limited liability companies created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States."

So yes, U.S. citizens and companies all over the world (192+ countries) have to file but so do Green Card holders and other U.S. immigrants inside and outside the U.S, as well as anyone who spends enough time on U.S. soil in a year to be considered a "resident."

Does that mean that all U.S. Persons must file this form?  No, there is one other condition to be met and that is the amount in the foreign accounts.

What is the Filing Threshold?  

The U.S. Person must have one or more Foreign Accounts (accounts with a foreign bank or financial entity outside of the U.S.) and the value of all the accounts taken together (that's what "aggregate" means) must have been above 10,000 USD (or about 7,000 Euros) at any point in a calendar year for there to be an FBAR filing obligation.

When is it due?

It must be received by those fine folks in Detroit by June 30th.  That means you are not supposed to mail it on June 29th from France or China or Australia. :-)

Update: A reader added some important information about filing in the comments section:  

"You might also want to mention that as of July 1, 2013, it will be mandatory that FBARS are filed electronically with the Treasury Department. From their website: 

"Electronic Filing for FBAR Forms – MANDATORY Beginning July 1, 2013
On June 29, 2011, FinCEN announced that all FinCEN forms must be filed electronically with certain exceptions. The FBAR was granted a general exemption from mandatory electronic filing through June 30, 2013. E-filing is a quick and secure way for individuals to file FBARs. Filers will receive an acknowledgement of each submission. For more information about FBAR e-filing, read the FinCEN news release."

So it looks like this is the last year the forms can be mailed.  If you (like me) are already cutting the deadline fine this year, it's probably best to file electronically now especially since (as Just Me points out) the deadline is really June 28 this year since June 30th falls on a weekend.

Examples?

Took me a while to wrap my head around this.  It wasn't until I had to fill out my own FBAR and I talked to other people who were doing it too that I finally felt that I had a good grasp of what this reporting requirement entails.  So here are a few broad examples drawn from my experience (and none of them represent a specific individual but are composites of different stories I've been hearing the past year)  that will hopefully give you a better idea how this all works and just how many unsuspecting people come to be in violation of U.S. law:

Second Generation Americans Living in the U.S.:  An American citizen residing in the U.S. for his entire life has a father living in Ireland.  The father passes away and part of the son's inheritance is his father's nine bank accounts with Irish banks (savings, checking, investment).  The value of any one of these accounts does not exceed 1,500 American dollars but together they are more than 10,000 USD which means that the son must start filing FBAR's with the U.S. government.

An American Couple in the U.S. with a Child Studying Abroad:  The child is accepted into a program at a foreign university where she will spend the next 2-4 years studying.  Let's say McGill (lots of American students at McGill).  She and her parents open an account for her in Montreal so they can pay her tuition and living expenses.  Between tuition, books, food, first and last month's rent, the value of the account temporarily exceeds 10,000 USD at the beginning of the academic year.  Let's congratulate these folks because they are now in possession of a "foreign account" and they now do some of their banking "offshore" in Canada.  Yes, they must file an FBAR.

Green Card holders:  A politician in the U.S. has a British wife (who one assumes is "legal" and held a Green Card at one point).   They used to live abroad but now they live in the U.S.  If his wife has accounts in the UK under her name that were opened before she moved to the U.S.(which seems reasonable to assume because that's where she grew up) or a member of her family added her name to their accounts to make it easier to care for aging parents or to facilitate inheritance, and the amount in all of those accounts exceeds 10,000 USD, then she is required to file an FBAR every year and disclose all those accounts.  

It doesn't matter that the money in those accounts never came from the U.S.  It is completely irrelevant even that she is a British citizen and that these accounts could be considered "local" to her.  She still has to report them to the U.S. government:  account numbers, highest balance in a calendar year and so on.

An American Abroad:  A young woman marries a German citizen and moves to Berlin.  She does part-time translation work at home because she has small children to care for.  They have all the accounts a family would be expected to have in order to live a normal life:  savings, checking, retirement.  Her name is on all of them.  The bulk of the money in those accounts was earned by her German husband in Germany (and the little she contributed was also earned there and has no connection to the U.S.) who is not a U.S. citizen, Green Card holder or resident.  She is still required to file an FBAR - she must disclose her husband's financial information - to the U.S. government. 

An Accidental American:  An individual living in Australia who was born in the U.S. when his parents were studying there and left as a child.  He realizes one day watching the news or through an American friend that he is in fact a U.S. citizen and that this status has certain implications.  He is in his mid-fifties and has savings as well as retirements accounts and so on.  He decides that he rather likes the idea of being a dual citizen and so he asks the U.S. government what he has to do to get compliant.

He is told about an IRS program that provides relief for Accidentals under certain circumstances.   If he qualifies, they say, he will only have to file three years of back tax returns and six years of back FBARs.  And then of course he must swear up and down to remain compliant from that point on.

And if he doesn't qualify?  If he actually owes U.S. tax in excess of 1,500 USD for any of the years he failed to file then he doesn't qualify and can't get compliant through this program.  

Let's say that all this annoys him to no end or he simply doesn't have the money to hire an international tax lawyer, what's the Plan B?  Well, the IRS has a compliance program (the OVDP -
Offshore Voluntary Disclosure Program) that he could join though it's not really clear if he should and no one should ever do this without the advice and help of a competent international tax lawyer.  

Perhaps he throws up his hand and decides to renounce his U.S. citizenship.  Joker.  In theory he is not supposed to do this unless he files all those back tax returns and FBARs and pays the Exit Tax (if it applies to him).  Phil Hodgen's has a brief but very useful post about this here.

I hope this effort to provide some clarity around FBARs is useful to you or someone you know.  If you have your own examples to add, I'd be delighted to hear them and I will post them as they come in.

I think we can all agree, however, that this is quite a mess. FBARs (and FATCA too) are a huge net with a very fine mesh and I have to wonder what would happen if everyone who was supposed to file actually did it.  Imagine the millions upon millions of forms pouring into Detroit, Michigan to be processed and IRS agents combing through the standard savings and checking accounts of English teachers in Italy or IT workers in Shanghai to find the needle in the haystack.  If that happens then this system meant to catch U.S. residents with "offshore" accounts might actually help them to hide more effectively (yes, Virginia, there is such a thing as TMI-Too Much Information).   

In another post we'll talk about where the FBAR came from and what it was meant to do.  

(Here's a hint:  A three letter acronym, "BSA.")