Foreign Bank Account Reporting: Basics & Misunderstandings – Redistributed
By Bethany Banks
This article first published on November 29, 2021, is being redistributed with an update on where to locate the Treasury Reporting Rates of Exchange. We want to ensure our readers are aware that this information is current as of the date of republication.
While not a new topic, many have misunderstandings about the required reporting of foreign bank accounts. Some common misunderstandings are determining when the taxpayer has passed the reporting threshold, what to do about accounts with signature authority only, and where to locate the conversion rate.
Background
Under the Bank Secrecy Act, the Department of the Treasury has the authority to gather information from US persons with bank accounts (financial interest and/or signature authority) with foreign financial institutions. Foreign bank account reporting is a topic that has grown in interest to the government since the Bank Secrecy Act. You may even recall news articles about UBS, the John Doe Summons, and issues with numbered accounts. The foreign bank account report, known as FBAR (FinCen Form 114 Report of Foreign Bank and Financial Accounts), is required annually by those US persons with foreign bank accounts that in aggregate exceed $10,000 USD at any point in the year.
Misunderstanding 1: When has the reporting threshold been surpassed?
A common misconception is that if all the accounts are below $10,000 then there is not a filing requirement. However, the threshold is in aggregate, so the taxpayer has to consider all applicable accounts together. That means you can trigger the filing requirement even if all accounts stay under $10,000 USD individually.
For example, foreign account A on 6/10/XXX1 was $5,000 and foreign account B on 6/10/XXX1 was $6,000. There would be an aggregate balance exceeding $10,000, making the FBAR required even though the individual account balances were below $10,000. Even if the aggregate balance exceeded the threshold only for one day, there would still be a FBAR requirement for year XXX1.
Misunderstanding 2: Signature Authority Only Accounts
Taxpayers frequently miss reporting their signature authority only accounts on FBAR filings. US persons that are signatory only on foreign accounts that exceed the aggregate threshold have a filing requirement. For example, Susie Q has domestic bank accounts personally and has signature authority for account Z in Mexico. Susie has no financial interest in account Z. Account Z had a maximum balance during the reporting year of $15,000. Since Susie Q has signature authority on the account, she needs to file an FBAR for the reporting year to disclose the bank account.
Misunderstanding 3: Conversion Rate
Bank account balances are often provided to preparers in USD after the taxpayer has converted the foreign currency into USD. Balance conversion can be an area of concern if the proper and consistent rate source has not been used. The Financial Crimes Enforcement Network (FinCEN) provides in their instructions to use the Treasury Department’s Financial Management Service (FMS) rate at the last day of the calendar year (12/31/XX spot rate). The Treasury Department is no longer providing the rates via the FMS and is instead providing them through the Treasury’s FiscalData site. FiscalData has a robust listing, but the FinCEN provides additional instructions in the event there is no rate available with from the Treasury for the currency in question.
Commonly, filers use the average rate when providing the balance to the preparer. Using the average rate can lead to underreporting or overreporting. As a result, the best way to provide the foreign account balance to the preparer is in the functional currency of the account with a clear notation of the account’s currency denomination.
Filing
The FBAR must be submitted electronically and has a due date of April 15th with an automatic extension to October 15th. There are significant penalties for failure to file Form 114, and it is important to inform your tax preparer adequately of your foreign accounts and assets so the preparer can best assist you.
Please reach out to your tax advisor if you have any questions about the foreign bank account reporting requirements.
The information contained in this article is for informative purposes only and should not be relied on when making any business, legal, or other decisions. This information may be updated without notice and/or may not contain the most current information that is available related to this topic. Please consult with your advisor to determine how this information applies to your specific facts and circumstances.