June 25, 2015
If you’re filling out your FBAR this weekend, here are some things to keep in mind.
The FBAR is a disclosure form, not a tax form. So even though it goes to the treasury department, it’s not like there’s any money owed.
Nonetheless, this is not something to be taken lightly, as the penalty for failing to file can be anywhere from $10,000 to 50% of the amount in each account for each violation. It can even come with jail time.
To help you stay out of the government’s crosshairs, I want to go over the top 5 mistakes people make when it comes to the FBAR. (Note that this is not official tax advice, so please go over all of this with your personal tax accountant.)
1. Misunderstanding the threshold.
I can’t tell you how often we come across people who say think they don’t have to file because they don’t have more than $10,000 in any one bank account.
In fact, the rule pertains to anyone who has had over $10,000 in the last calendar year cumulatively across all foreign financial accounts.
On top of that, it’s not what the account value was at the end of the year, it’s the maximum account value during the year.
So first, go back and convert the amounts in each of your bank accounts to dollars using the IRS’s official exchange rates.
Then add together the values of all your accounts at their highest points in the year.
If the amount you come up with exceeds $10,000 then you have to report ALL of your foreign accounts.
2. Not knowing what to disclose
If you meet the filing requirement, you’re required to report ALL of your foreign financial accounts.
This begs the question, of course: what constitutes a ‘foreign financial account’?
As of now, on top of bank accounts, this also means mutual funds, brokerage accounts, commodities options or future contracts, and insurance policies that have a cash value.
Other stores of wealth such as real estate, coins, jewels, collectibles, and precious metals like gold or silver do not count.
Though keep in mind that gold in a ‘gold account’ does need to be reported, like GoldMoney. But storing coins or bars in a safety deposit box offshore does not.
3. Forgetting your online financial accounts
New innovations in digital finance have complicated this whole matter even further. But it is essential to get this part right, because in many ways it is the easiest area for them to track your activity.
Thus far, Bitcoin is considered by the IRS to be property rather than currency. So it does not count towards the threshold. For now.
You also want to make sure to include other places where you store money online, such as an international Paypal account.
This may go beyond standard financial accounts, as the IRS has even gone after a man for not disclosing amounts he held in online poker accounts.
They claimed that his ability to withdraw money from the accounts made them the equivalent to financial institutions, and the sites were incorporated in foreign countries they were subject to the compliance requirements.
4. Not knowing what counts as foreign
The government definition in this case is the physical location of the account, not the nationality of the institution itself.
For example, opening an account in the Hong Kong branch of Citibank, does count as a foreign account for FBAR purposes; whereas the New York branch of Bank of China does not.
Again, don’t forget to check where the companies of your online financial accounts are based.
5. Forgetting your children
There is no minimum age limit for the FBAR, meaning that even those under the age of 18 are subject to this compliance requirement.
This includes accounts held by a parent on behalf of their children, given that the child is a signatory of the account.
Yes, that’s right, the government even goes after your children.
Just make sure you file
Yes, there are a lot of nuances and fine print with the FBAR. But don’t be discouraged– just remember the most important rule of all: file the form.
Even if it’s less than perfect, even if you don’t fully understand, my personal view is that it’s important to make a good faith effort.
And if you have any doubts, it’s better to err on the side of reporting something rather than not reporting it.