If you have a foreign bank account, you may have heard the term FBAR from your attorney, CPA, or financial planner. If you haven’t, and you have an open foreign bank account, a thorough understanding of this topic is essential to avoid potential fines and penalties by regulatory authorities.
What is FBAR?
In the simplest terms, FBAR is a rule that you must comply with if you have a foreign bank account. FBAR is Foreign Bank Account Statement, also referred to as Foreign Bank Account and Financial Statement. This report is a disclosure of the foreign bank accounts that you have and the transactions made in them. This activity is reported to the IRS for TD F 90-221, an additional attachment to your tax return in the United States.
Does everyone with a foreign bank account have to file an FBAR report? Not. If your aggregate balance in all your foreign bank accounts does not exceed US$10,000, then you do not need to file an FBAR report. However, if your offshore bank account balance is more than $10,000 and you do not report the FBAR, you may be subject to severe fines and penalties by the Internal Revenue Service (IRA). In fact, penalties can include jail time.
Bank Secrecy Act
The law underlying the FBAR requirements is the Bank Secrecy Act (BSA), which requires you to annually report foreign financial activity to an IRA via form TD F 90-221, Foreign Bank Statements and Financial Accounts. These laws are not the easiest as the language can be very convoluted, and that’s why I wanted to break them down in simpler terms so you can easily comply with them if you feel they apply to you.
This law applies not only to bank accounts, but also to other financial accounts. for example, if you have a foreign trading account or a foreign brokerage account, investing in mutual funds or other similar accounts with a financial interest or authority, then you must disclose it in the form of an FBAR.
Why is the FBAR Form Necessary?
Simply put, the FBAR form is needed because the world is too big and the United States government can’t be everywhere and know everything. The purpose of the FBAR form is for persons with foreign financial interests to report their activities. Offshore banks and financial institutions operate under different rules and regulations, most of which differ from those of the United States. Therefore, persons holding foreign bank accounts are not subject to the same type of reporting in the local jurisdiction where the offshore bank account is kept.
The United States wants to keep its pulse on people who are abroad so it can tax their income. The United States is one of the few countries that tax its residents based on global income. This means that wherever you earn income, if you are a resident or citizen of the US, you are required to disclose that income and pay taxes on that income.
Certain constituents in the United States are also interested in how these funds flow from one entity to another so that they can track and identify potential misuse of funds such as for terrorist groups. Money laundering is a big problem and reporting foreign bank accounts is one way for governments to track and identify such cases.
Finally, no country wants untaxed money to leave it in another offshore jurisdiction. Therefore, the FBAR form is another mechanism for the United States government to identify and tax money earned by its residents and citizens in foreign jurisdictions.
FBAR regulations have long been implemented by the US government. Finally around 2010 and 2011, it had to implement many of the proposed regulations effective by the end of March 2011. These regulations will continue to be formed from time to time and all updates will be made to the official FBAR TD F 90-22.1 compliance form.
So, in a nutshell, FBAR is a regulation imposed by the US Government to ensure its citizens comply and comply with its laws and regulations when it comes to reporting all income, paying all taxes due, and enabling transparency in their finances to reduce risk. money laundering implications.
