Navigating the nuances of tax reporting and compliance in the U.S. and around the world is a critical and core function for global mobility. With a post in the midst of the pandemic, we discussed that for global mobility, tax compliance is not "remotely" simple and focused in on how mobility was even more valuable in tracking remote work compliance. With that post, we tied back to an article by GTN's Jen Stein where she laid out for us the pros and cons of remote work.
Well, we are back, thanks to another article from GTN, this time by Tracy Novotny. She drives home immediately that for US citizens, permanent residents working outside of the US, and citizens of other countries who become tax residents of the US, there is a specific annual filing requirement related to any non-US financial accounts held. She explains that many are unaware of it too! Her warning is that:
|A US person (as defined below) may have to file the Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR), if the aggregate value of non-US financial accounts exceeds USD $10,000 for even one day in a calendar year.|
Note that we need to emphasize the word "aggregate". So let's restate that: The minimum account threshold – or level – you as a US citizen abroad need to hold, to file for an FBAR is if you have over $10,000 combined from all your foreign bank accounts at any one time throughout the year.
The article answers 8 important questions relating to FBAR filing requirements and achieving U.S. tax compliance. Those questions are:
- Who must file an FBAR?
- Who is a US person" for FBAR purposes?
- What is a Foreign Bank / Financial Account?
- What information must be reported on the FBAR?
- Isn’t the FBAR part of the US Form 1040?
- When is the FBAR filing due?
- What are the potential penalties for noncompliance?
- What can I do if I have not complied with the FBAR filing requirements?
Most people understand that savings and checking accounts physically located outside of the U.S. are included but many do not realize that it includes securities or brokerage accounts, whole life insurance accounts, retirement accounts (not held with a government), and annuities with a cash value maintained outside the US. Foreign accounts holding virtual currency may not be reportable on the FBAR unless it is a reportable account for other financial assets being held. So what doesn't count?
Per Vistra, there are five types of accounts that are exempt from FBAR reporting requirements:
- U.S. government entity accounts
- International financial institution accounts
- U.S. military banking facility accounts
- Correspondent or nostro accounts
- Certain custodial or omnibus accounts
Further exemptions include:
- IRA owners and beneficiaries
- Participants in and beneficiaries of a tax-qualified retirement plan
- Certain trust beneficiaries
- U.S. entities included in a consolidated FBAR
Tracy points out that while there is a connection to the U.S. Form 1040, FBAR is a separate report and submission and the penalties for noncompliance can be severe. An example she provides is:
- Taxpayers who are found to have willfully failed to file or retain records of account can receive a civil penalty as high as the greater of $100,000 or 50% of the amount in the account at the time of the violation.
- Criminal penalties can apply for cases of willful noncompliance and can include prison and fines of up to $500,000.
- Non-willful violations are subject to a civil penalty of up to $12,459 per violation.
With this level of penalty, U.S. taxpayers should take this very seriously!
Right now in the Supreme Court, there is a case being heard (Bittner v. United States). The issue in the case being that the Romanian-born businessman/investor failed to report on dozens of accounts over a period of time incurring $2.72 million in FBAR penalties for his five years of violations instead of $50,000. We'll be closely watching this case and ruling. While the IRS currently has programs available to help taxpayers be compliant, this is really one more reason that most all companies that are sending employees working abroad provide some level of professional expat tax service and guidance!
With today’s ability to work from anywhere, understanding and staying on top of the reporting and ongoing US filing requirements can be difficult. However, for employees working outside of their typical Home location, not only understanding these requirements but being diligent in adhering to them is especially important. Taxpayers are often surprised by the tax filing obligations and are often not prepared to handle the detailed reporting requirements. For US citizens, permanent residents working outside of the US, and citizens of other countries who become tax residents of the US, there is a specific annual filing requirement related to any non-US financial accounts held.