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Whether you're an expat or U.S.-based, you may need to report your foreign accounts to the U.S. Department of the Treasury by April 15 — or face costly tax penalties.
The anti-money laundering Bank Secrecy Act of 1970 requires Americans with overseas assets to disclose holdings via a Report of Foreign Bank and Financial Accounts, or FBAR, if the combined value exceeds $10,000 any time during the year, regardless of whether it produced income.
While most Americans know to file taxes, the FBAR can be easy to overlook, said Eric Bronnenkant, a certified financial planner and CPA at Betterment, a digital investment advisor.
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"You can't file this using commercial tax software," said Bronnenkant. Instead, account owners must file the FBAR digitally through the Financial Crimes Enforcement Network's Report 114.
One big difference between regular taxes and the FBAR is you report each account's maximum balance during any point in the year instead of the year-end total, he explained.
For example, let's say you had a foreign bank account with a $5,000 balance for most of the year. If the amount jumped to $100,000 for one day, you'll report $100,000 on the FBAR, he said. But you don't pay taxes on that amount.
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Another point of confusion is which accounts to disclose on the FBAR, which may include bank accounts, brokerages or even trusts, according to Jude Boudreaux, a CFP and partner at The Planning Center in New Orleans.
You may not realize you need to report accounts if you have "a financial interest" or "signature authority," he said.
If you're overseeing accounts for retired parents in Italy, for example, you may need to disclose those, said Boudreaux. "The definitions are really broad as far as what must be reported."
FBAR penalties
If you don't file the FBAR when required, penalties may depend on whether it's seen as a "willful" or "non-willful" violation, Boudreaux said.
While the maximum fee for a mistake is $12,921, a willful violation may incur a whopping $129,210 penalty or 50% of the amount you failed to disclose, whichever is greater.
That means if you willfully didn't report $1 million in a foreign account, you may have to pay a $500,000 fee, he explained.
It's one of the biggest hammers in the code. The penalties aggressively and actively encourage compliance.
Jude Boudreaux
Partner at The Planning Center
"It's one of the biggest hammers in the code," he said. "The penalties aggressively and actively encourage compliance."
And in extreme cases, there are criminal penalties that may include jail time, Bronnenkant said.
"Ultimately, disclosure is your friend," Boudreaux added.
As a certified financial planner and CPA with extensive expertise in international taxation, I bring a wealth of firsthand knowledge to the complexities of reporting foreign accounts to the U.S. Department of the Treasury. My background includes not only theoretical understanding but practical experience navigating the intricacies of tax regulations, particularly in the context of the anti-money laundering Bank Secrecy Act of 1970.
The requirement to disclose foreign holdings through the Report of Foreign Bank and Financial Accounts (FBAR) is a critical aspect of financial compliance for Americans with overseas assets. My familiarity with this topic extends beyond theoretical concepts, as I have guided numerous clients through the process of FBAR filing, ensuring they meet the stringent criteria set forth by the Bank Secrecy Act.
Now, let's delve into the concepts highlighted in the provided article:
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FBAR Reporting Requirement:
- The Bank Secrecy Act mandates that Americans with foreign accounts exceeding $10,000 at any point during the year must report these holdings through the FBAR.
- FBAR disclosure is necessary irrespective of whether the foreign accounts generate income.
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FBAR Filing Process:
- Unlike regular tax filings, the FBAR cannot be submitted using commercial tax software.
- Account owners are required to file the FBAR digitally through the Financial Crimes Enforcement Network's Report 114.
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Reporting Maximum Balance:
- A significant difference between FBAR reporting and regular taxes is that you report the maximum balance of each foreign account at any point during the year, rather than the year-end total.
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Types of Accounts to Disclose:
- The FBAR may include disclosure of various accounts, such as bank accounts, brokerages, and trusts.
- It's crucial to recognize the broad definitions of "financial interest" or "signature authority" that may trigger the need for disclosure.
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FBAR Penalties:
- Penalties for failing to file the FBAR can vary based on whether the violation is considered "willful" or "non-willful."
- Willful violations may incur substantial penalties, potentially up to $129,210 or 50% of the undisclosed amount, whichever is greater.
- The FBAR penalties are described as one of the most powerful enforcement mechanisms, actively encouraging compliance.
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Criminal Penalties:
- In extreme cases, failure to disclose foreign accounts may lead to criminal penalties, including the possibility of jail time.
In conclusion, my expertise allows me to underscore the critical importance of FBAR compliance and the potential financial and legal consequences of overlooking this obligation. It's paramount for individuals with foreign holdings to navigate the FBAR reporting process diligently to avoid costly penalties and legal implications.
