November 5, 2012. A short tax form with a long name – Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (known as the “FBAR”) – is generating a lot of news this year among San Francisco residents as the U.S. Treasury Department and the IRS ramp up their oversight of taxpayers with foreign accounts. This letter highlights some of the key elements of FBAR reporting. Keep in mind that you may also be required to file new IRS Form 8938, Statement of Specified Foreign Financial Accounts. The Foreign Account Tax Compliance Act (FATCA) of 2010 created separate and distinct reporting requirements for certain taxpayers holding specified foreign financial assets.
FBAR and San Francisco
Because San Francisco is an international city and a hotbed of small business / startups, we see many San Francisco clients with tax issues relating to foreign business and assets. If you have foreign assets, please contact Safe Harbor CPAs immediately to discuss these important regulatory requirements.
Bank Secrecy Act
The Bank Secrecy Act requires each United States person with a financial interest in, or signature authority over, any financial accounts with an aggregate value of more than $10,000 at any time during the calendar year, including bank, securities or other types of financial accounts in a foreign country to report that relationship by filing an FBAR. The term “United States person” means a citizen or resident of the United States, a domestic partnership, a domestic corporation, or a domestic estate or trust.
The Treasury Department issued final rules in 2011 explaining whether an account is foreign and therefore reportable as a foreign financial account. The final rules also revise the definition of “signature or other authority” and explain that an officer or employee who files an FBAR because of signature or other authority over the foreign financial account of the employer is not expected to personally maintain the records of the employer’s foreign financial accounts.
The FBAR must be received by the IRS on or before June 30 of the year following the calendar year being reported. The FBAR is not filed with the taxpayer’s federal income tax return. Instead, it is mailed to the Treasury Department or filed electronically with the Treasury Department.
In March 2012, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) announced a one-year exemption from mandatory electronic filing of the FBAR. The exemption for electronic filing of the FBAR is available until July 1, 2013.
Some individuals who failed to timely file FBAR(s) may qualify for streamlined procedures to get back into compliance. In mid-2012, the IRS announced streamlined procedures for U.S. citizens who are nonresidents, including dual citizens, who have failed to file U.S. income tax and information returns, such as the FBAR. Under the new procedures, qualified taxpayers generally must file delinquent returns for the past three years, delinquent FBARs for the past six years, pay any federal tax and interest that is due, and comply with other requirements. The IRS indicated that review would be expedited for individuals who are deemed “low risk.” These are generally returns with little or no U.S. tax due.
Signature or other authority
One frequently asked question is what is “signature or other authority.” The Treasury Department explained in the final rules that signature or other authority means the authority of an individual (alone or in conjunction with another) to control the disposition of money, funds or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained. The Treasury Department further explained that the test for determining whether an individual has signature or other authority over an account is whether the foreign financial institution will act upon a direct communication from that individual regarding the disposition of assets in that account.
Generally, the Treasury Department has defined the term ‘‘bank account’’ to mean a savings deposit, demand deposit, checking, or any other account maintained with a person engaged in the business of banking. The term ‘‘securities account’’ means an account with a person engaged in the business of buying, selling, holding or trading stock or other securities. The term ‘‘other financial account’’ means (i) an account with a person that is in the business of accepting deposits as a financial agency; (ii) an account that is an insurance or annuity policy with a cash value; (iii) an account with a person that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association; or (iv) an account with a mutual fund or similar pooled fund or other investment fund.
The Treasury Department has had many questions in recent years about mutual funds and FBAR reporting. According to the Treasury Department, some taxpayers have questioned that the term mutual fund may have a different meaning outside the U.S. and could potentially cover hedge funds and private equity funds that have periodic redemptions. In the final rules, the Treasury Department reiterated that the definition of mutual fund includes a requirement that the shares be available to the general public in addition to having a regular net asset value determination and regular redemption feature. Additionally, the final rule reserves the treatment of investment companies other than mutual funds or similar pooled funds.
Of course, there are exceptions. The exceptions include accounts in institutions known as United States banking facilities and also correspondent accounts maintained by banks and used solely for bank-to-bank settlements. Please contact our office for more details about the exceptions.
New Form 8938, Statement of Specified Foreign Financial Assets, is similar to the FBAR but has some important differences. The threshold for filing Form 8938 is higher than the FBAR (and the threshold varies depending on the taxpayer’s status and location). Form 8938 also applies – at this time – to only specified individuals and covers only specified foreign financial assets. The IRS has issued guidance describing who is required to file Form 8938, what constitutes a specified foreign financial asset, and more. Unlike the FBAR form, Form 8938 is filed together with your Form 1040 tax return if required. The IRS has posted information on its website to help taxpayers distinguish the FBAR and new Form 8938. In certain areas, the two forms overlap. If you have any questions about the FBAR or foreign account reporting, please contact our office.
San Francisco Bay Area Residents with Foreign Income
If you are a San Francisco Bay Area resident, become aware of FBAR. But more importantly reach out to a top San Francisco CPA firm – an expert in tax compliance. Our job is to advise you on how to comply legally with the myriad of regulatory changes coming from the IRS. Our motto at Safe Harbor CPA’s is “we work harder for you.” FBAR and FATCA may seem complicated – but really, your job is not – reach out to us and let us do the heavy lifting for you. Call us at 415.742.4249 or email us.