Failure to File Due to Reasonable Cause

While penalties for non-compliance can be severe, the IRS may waive penalties if the failure to file was due to reasonable cause. A person who has not previously filed an FBAR, but who has properly filed federal income tax returns that fully reported the income from any foreign account(s), may be eligible for the IRS Delinquent FBAR Submission Procedures. Under the Delinquent FBAR Submission Procedures, "[t]he IRS will not impose a penalty for the failure to file the delinquent FBARs if you properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted." Under this straightforward procedure, a U.S. person simply e-files the delinquent FBAR and includes a brief statement that explains why the FBAR is being filed late.

Streamlined Procedure for Non-Resident Filers Where Failure to File Not Willful

In addition, under the IRS's Streamlined Filing Compliance Procedures, a non-resident U.S. person who mistakenly failed to file an FBAR and/or failed to report on a U.S. tax return income related to a foreign financial account can avoid the imposition of any penalties if the non-resident taxpayer's failure to file a U.S. tax return and/or FBAR was not willful. The Streamlined Program requires a participant to file federal income tax returns (or amended returns) for three prior years and FBARs for six prior years, along with a declaration (signed under penalties of perjury) attesting that his or her failure to file was not willful.

Frequent Mistakes

Under U.S. law, a "U.S. Person" is required to file annually an FBAR reporting his or her ownership of or signature authority over certain "foreign financial accounts." Here is how the FBAR reporting rules are most frequently misunderstood, leading to mistakes that may be corrected through one of the above-described procedures:

1. Failure to File.  By far, the most common FBAR reporting mistake is simply failing to file.  Despite well publicized enforcement actions, as well as corresponding amnesty programs, many U.S. persons with foreign financial accounts remain unaware of the FBAR reporting obligations.
2. Misunderstanding the US $10,000 Threshold. The reporting obligation is triggered if the maximum aggregate balance exceeds US $10,000 at any time during the calendar year.  Thus, the US $10,000 reporting threshold is not determined on an account-by-account basis.  In addition, a person required to file an FBR must report all of his or her foreign financial accounts, including any accounts with balances under US $10,000.
    
3. Failure to Report Beneficial Ownership. The obligation to file an FBAR includes any U.S. person who has a "financial interest" in a foreign financial account.  Thus, a U.S. person is required to file an FBAR if the owner of record or holder of legal title of the account is acting on the person's behalf as an agent, nominee, attorney, or in "some other capacity."  For example, if U.S. siblings inherit money from their mother and leave the funds in her estate's foreign bank account, the siblings also have a reportable financial interest in the estate's foreign financial account and each sibling is required to file an FBAR.
    
4. Failure to Report Life Insurance, Retirement, and Other Non-traditional Financial Accounts. The definition of "financial account" includes, inter alia, certificates of deposit, passbook accounts, securities (investment) accounts, accounts with a person that acts as a broker-dealer for futures or options transactions, and mutual funds or similar pooled funds.  The definition also expressly includes an insurance or annuity policy with a cash value.  In many circumstances, foreign retirement accounts must be reported on FBARs.
    
5. Failure to File by a U.S. LLC, Partnership, Disregarded Entity or Estate. Corporations, partnerships, limited liability companies (LLCs), trusts and estates formed or organized under the laws of the United States all fall within the definition of a U.S. person required to file an FBAR.  Thus, a Delaware or Nevada LLC treated as a disregarded entity is still required to file an FBAR if it maintains foreign financial account(s) with a maximum aggregate balance of more than US $10,000.  This is the case even if the owner of the LLC is foreign.
    
6. Failure to File an Individual Report by the Majority Owner of a Business Entity. A U.S. person who owns, directly or indirectly, "(i) more than 50 percent of the total value of shares of stock or (ii) more than 50 percent of the voting power of all shares of stock" of a U.S. or foreign corporation is treated as the owner of the corporation's foreign financial accounts for FBAR reporting purposes and is required to file an FBAR on his or her own behalf reporting the corporation's foreign financial accounts.  The rules apply similarly to a majority partner in a partnership or majority owner of any other (flow-through) entity.
   
   
   Significantly, theses personal filing obligations are separate from any obligation that the business entity in which the person holds a majority interest may have.  Accordingly, if the corporation, partnership or other entity is a U.S. person, then the entity itself may also be required to file an FBAR.  The controlling shareholder of a corporation with a foreign corporate account holding a high balance of US $6,000 who also maintained a personal foreign financial account with a high balance of US $6,000 is required to file an FBAR and report both accounts because the aggregate value of his foreign financial accounts exceeds US $10,000.
    
7. Failure to File by Trustee, Grantor or Beneficiary of a Trust. A U.S. trustee who has signature or other authority over a U.S. or foreign trust's foreign financial account(s) is required to file an FBAR in his or her capacity as a signatory on the account (in addition to the trust's obligation to file an FBAR).  Furthermore, a U.S. person who (i) is the trust grantor and (ii) has an ownership interest in the trust for U.S. federal tax purposes is treated as the owner of the trust's foreign financial account(s) for FBAR reporting purposes and must file an FBAR reporting the trust's foreign bank accounts.
   
   A U.S. person who is the beneficiary of a foreign or U.S. trust is treated as the owner of the trust's foreign financial accounts for FBAR reporting purposes and is required to file an FBAR reporting the trust's foreign financial accounts for if the person has a greater than 50 percent present beneficiary interest in the assets or income of the trust for the calendar year.  However, such a beneficiary may avoid FBAR reporting if the trust, trustee, or agent of the trust is a U.S. person who files an FBAR disclosing the trust's foreign financial accounts.
8. Filing of Joint FBARs by Spouses. Spouses are permitted to file a joint FBAR only if each of the following conditions is satisfied:  (1) All the financial accounts that the non-filing spouse is required to report are jointly owned with the filing spouse; (2) the filing spouse reports the jointly owned accounts on a timely filed FBAR electronically signed; and (3) the filers have completed and signed FinCEN Form 114a Record of Authorization to Electronically File FBARs.  If the non-filing spouse owns or has signature authority on an account that the filing spouse is not required to report, then both spouses must file separate FBARs.
9. Failure to File by Minor Children. Minor children who are U.S. citizens or residents must file FBARs if they are the owners or signatories of foreign financial account(s) that meet the US $100,000 aggregate threshold.
10. Failure to Comply with Bank Secrecy Act Record Retention Requirements. A U.S. person who falls within the FBAR filing requirements is required to maintain certain information and records relating to foreign financial accounts for five years.  A complete an accurate FBAR will satisfy these record retention requirements.