In recent years, the IRS has been taking a closer look at Form TD F 90-22.1, otherwise known as FBAR. The filing requirements for FBAR are confusing, but it is important to meet those requirements in order to help avoid an audit. Here are some of the guidelines you should follow when you are filling out your annual report of foreign financial accounts.
Who FBAR applies to
All U.S. persons – defined as a citizen or resident of the US, or as a domestic entity such as a trust, corporation, or partnership – who have a financial interest in, or signature or other authority over, foreign financial accounts that have an aggregate value exceeding $10,000 at any time during the calendar year are required to report their foreign financial accounts on the FBAR form.
The challenges of FBAR for corporations
One of the main problems comes with the corporate part of the law. Many US corporations have expressed confusing with how the rules affect their employees and officers who have authority over these foreign accounts. Because of this confusion, the governing authority FinCEN (part of the US Department of Treasury) has granted a filing extension in some of these cases.
2013 deadline for filing 2012 FBAR
The FBAR filing deadline has a few rules that are important to note. First, the normal date for filing the previous year’s document is June 30, 2013, but that date falls on a Sunday this year. So the FBAR is due instead on Friday, June 28th.
Also, it is important to note that the due date is counted when the document arrives at the Treasury and not when it is postmarked. This is different from regular tax filing and should be noted so that you make sure you have enough time to mail your FBAR document. You may also overnight the document or file it electronically.
How to tell if U.S. Persons have what is called a financial interest in accounts of subsidiaries and other entities.
If a U.S. person is a named holder of legal title or a named owner of record then they automatically have a financial interest in a foreign financial account. There are other rules though, that also qualify a U.S. person to be considered by the IRS to have a financial interest through indirect ownership. Here are three different ways this can apply:
1. If the U.S. person owns indirectly or directly more than 50% of the total value of the shares or 50% of the voting power
2. If the U.S. person is in a partnership that owns either indirectly or directly 50% or more of the capital or profits interest
3. If the U.S. person owns any other entity either indirectly or directly and has control of more than 50% of interest in profits, equity interest or assets, or voting power.
If any of these conditions are met and the aggregate value of all foreign financial accounts of the U.S. corporation exceeded $10,000 at any time during the calendar year the U.S. corporation should file the FBAR document for the year in question.
Filing a FBAR for an entity your corporation owns
If you own a corporation that owns either indirectly or directly a more than 50% interest in anther U.S. entity then you can file a consolidated FBAR for both entities.
It is important to note that in order for both entities to filing obligations to me met, the lower-tier U.S. corporation should be named in Part V of the consolidated FBAR document.
You may have to list each account more than once if there are multiple sub-entities. If this is the case make a note to explain at the bottom of the page.
There is a reporting exception for some officers and employees.
The reporting exemptions are one of the more difficult portions of the FBAR requirements and have been subject to a fair amount of confusion.
In some cases U.S. persons may be required to file a FBAR even if they don’t have a financial interest in a foreign financial account. If an individual has signature or other authority over financial accounts that are in another country, then they need file a FBAR. However, the FBAR regulations also state that if the individual only has supervisory capacity over an account that they don’t need to file a FBAR.
If an employee or officer has signature authority at one of these types of institutions, but no direct financial interest in a foreign account (where all the financial interest is held by the corporation) and the account falls under one of the following six rules the U.S. person may qualify for a reporting exception:
1. A bank that is examined by the National Credit Union Administration, the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, or the Office of the Comptroller of the Currency.
2. A financial institution that is registered with and examined by the Commodity Futures Trading Commission or the SEC.
3. An “Authorized Service Provider” that is registered with the SEC and that provides services to the investment companies.
4. If the subsidiary is included in a consolidated FBAR report that is filed by the parent and the U.S. subsidiary of a U.S. entity with a class of equity securities listed on a U.S. national securities exchange.
5. An entity with American depository receipts listed or a class of equity securities listed on any U.S. national securities exchange.
6. An entity with more than 500 shareholders of record and more than $10 million in assets that has a class of equity securities registered under section 12(g) of the Securities Exchange Act.
This seems like really good news and that many people will be exempted from the FBAR reporting requirements, but the above rules are all limited in scope and the exception is NOT available to the following U.S. persons.
1. Offices and employees of foreign subsidiaries of U.S. corporations who have signature authority over the foreign financial accounts of such foreign subsidiaries, notwithstanding that the U.S. parent company is obligated to report such foreign financial accounts in its own FBAR.
2. Officers and employees of U.S. subsidiaries of foreign corporations who have signature authority over foreign financial accounts, as the foreign parent is not required to file an FBAR and the U.S. subsidiary’s stock is not publicly traded. This rule applies even if the foreign corporation voluntarily files an FBAR report.
3. Officers and employees of a U.S. parent corporation who have signature authority over a foreign financial account of a U.S. subsidiary with regard to the subsidiary’s account. Similarly, officers and employees of a U.S. subsidiary that have signature authority over a foreign financial account of its U.S. parent do not qualify for the exception from reporting on the FBAR with regard to the U.S. parent company’s account. These exclusions from the reporting exception apply regardless of whether the two U.S. companies file a consolidated FBAR report.
Because these rules are so confusing, the FinCEN has provided extensions to filing in many cases. The extensions now go through June 30, 2014 for those who qualify. However, you cannot qualify for an extension if you have signature authority and financial interest in a foreign account.
Penalties for not filing a FBAR
It is a wise idea to check with our tax firm before claiming an exception for filing the FBAR form. If a U.S. person does not file a FBAR and is required to do so by law the penalties can range from $500 to $10,000 per account. The amount depends on how severe the failure is. Also, harsher penalties can also be imposed if the failure to report in considered willful.
Questions? Contact us at www.capitaltaxltd.com
If you have questions about the requirements for FBAR, either as a corporation or as an individual, please give us a call. We are happy to assist you in staying in compliance with the law.