Like several other countries, the United States has undertaken an intense and sustained campaign to crack down on international tax evasion in recent years. The IRS’s efforts to date have centered on the U.S. Treasury Department’s Foreign Bank Account Report, Form TD F 90-22.1 (“FBAR”).
U.S. citizens and residents who have a financial interest in, or signature authority over, foreign financial accounts in excess of $10,000 must file this form with the Treasury Department each year. Green card holders and persons meeting the Substantial Presence Test (generally, those who are present in the United States for the equivalent of 183 days or more when applying a three-year look-back test) must file the FBAR. Taxpayers who are nonresident aliens for income tax purposes (including G-4 visa holders) are not required to file the FBAR, even if they make an election on their income tax return to file as a resident so that they can file jointly with their spouses.
While the law requiring the FBAR to be filed has existed since 1970, it was largely ignored prior to 2008. The FBAR rules were unclear in many areas, and as few taxpayers were filing FBARs, many of these rules and definitions remained ambiguous.
When the IRS recently began enforcing the FBAR rules for the first time, they also set out to clarify taxpayers’ FBAR reporting requirements. Since 2008, the IRS has significantly updated, expanded, and clarified the FBAR rules, including revising the FBAR form itself three times (most recently in November). Some of the recent changes and clarifications include the following:
- Financial account: The new FBAR instructions specify that a “financial account” for purposes of FBAR reporting includes commodity futures and options accounts and life insurance or annuity products with a cash surrender value, in addition to bank and securities accounts. They also clarify that a financial account includes shares of a mutual fund or similar pooled fund that is available to the general public with a regular net asset value determination and regular redemptions. Private equity funds and hedge funds fall outside of this definition.
- Exceptions to filing: The IRS has detailed a number of additional exceptions to the FBAR filing requirements. Foreign financial accounts owned by international financial institutions or U.S. governmental entities do not need to be reported on an FBAR. Employees of certain financial institutions or publicly traded companies are not required to report their signature authority over foreign financial accounts owned by their employer. Trust beneficiaries do not need to file an FBAR to report the trust’s foreign financial accounts if the trust or its trustee is a U.S. person and files an FBAR reporting the accounts.
- Disregarded entities: Entities that are disregarded for federal income tax purposes nevertheless must file an FBAR to report foreign financial accounts.
- Valuing accounts: The IRS has provided more specific instructions regarding how to determine the maximum value of foreign financial accounts reported on the FBAR, including what exchange rate to use when converting foreign currencies into U.S. dollars.
As taxpayers continue to file FBARs to report their foreign accounts, and as additional taxpayers begin filing FBARs for the first time, further questions and issues are sure to be discovered. The IRS will continue releasing updates and clarifications of the FBAR rules so that taxpayers may fulfill their reporting requirements.
If you have any questions related to the FBAR reporting requirements, please contact Grant Miller at 703.502.9500 or firstname.lastname@example.org.
This newsletter is for informational purposes only. It should not be construed as tax, legal, or investment advice. Information has been gathered from sources believed to be reliable, but individual situations can vary and you should consult with your investment, accounting and/or tax professional.
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE WOLF GROUP TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.