Time is Running Out: Verify Your Clients’ FBAR Obligations Now
June 30 will be here very soon – making sure your clients are compliant with the requirement to file a Report of Foreign Bank and Financial Accounts by that date is critical as civil penalties for failure to file are huge – they range from $10,000 up to $100,000 or 50% of the total foreign account balance. Criminal penalties include $250,000 or five years of imprisonment or both.
If your client is a U.S. resident and has a total of $10,000 or more in all foreign bank accounts combined or has signature authority over a foreign account, he or she must file FBAR Form TD F 90-22.1 annually. The FBAR is a report and is not to be filed with the income tax return. What makes the FBAR different from many other forms is that it must be received, not postmarked, by June 30 and it is filed with the U.S. Department of Treasury, not the IRS. Also, there are no extensions.
And some detective work may be in order. When reviewing your client’s foreign bank activity, you may be surprised to find out that they have an additional account that they didn’t know about or that they have funds in a non-US person’s account but do not have legal ownership. For some clients, they will tell you that they closed their account, did not receive any more statements from the bank and believe there is no more reporting obligation. In this situation, the account was still open for part of the year and, therefore, needs to be disclosed on the FBAR. These are some things to watch out for.
Don’t wait until the last minute to complete your client’s FBAR! Why? First, it takes time to request account information from the overseas banks. For non-brokerage accounts, monthly or periodic statements are needed to determine the highest balance for the year. For brokerage or securities accounts, the requested information should include these three essential bank documents:
- Statement of Assets (monthly or periodic),
- Income Summary, and
- Capital Gain/Loss summary
If the banks do not have this information available, then your client should request account activity statements for the year.
Second, for clients on extension, you will need this information to complete their tax return. Analyze the bank statements for interest income, dividends, securities sales and other earnings generated by the account. Any earnings on the foreign accounts are required to be reported on the return. Special rules apply to income from foreign mutual funds (Passive Foreign Investment Company). Remember to report your client’s highest account balance on Form 8938, Statement of Specified Foreign Financial Assets.
Form 8938 is in addition to the FBAR and has different reporting requirements - it focuses on specified foreign financial assets and covers a broader area than a foreign bank account. View a comparison of the differences between Form 8938 and FBAR.
It makes sense to work on your client’s FBAR before you prepare the tax return because the account information you analyze for the FBAR may be used for the return. You will avoid filing an amended tax return if you later discover that account earnings were previously excluded from the original filing.
Gary L. Howard, CPA, Managing Principal, G.L. Howard, CPA. Gary has been specializing in tax controversy and litigation support for civil and criminal matters since the founding of his firm in 1986. He holds a M.S. in Taxation from Golden Gate University, San Francisco and a B.A. in Economics and Accounting from California State University, Fullerton.