Having assets in foreign accounts comes with more complex filing requirements, and clients will turn to pros like you for help. To ensure you’re informed and prepared, we’re covering the most common filing requirements for foreign accounts, including IRS Form 8938 and the FBAR.
What is an FBAR, and who needs to file one?
Anyone with foreign accounts that total more than $10,000 at any point during the year must file an FBAR, also known as FinCEN Form 114 and the Report of Foreign Banks and Financial Accounts. FBAR reporting requirements don’t apply to U.S. citizens. Green Card holders, resident aliens, U.S. corporations, LLCs, partnerships, and trusts/ estates with foreign assets are also required to report.
What types of foreign accounts are reported on the FBAR?
While foreign bank accounts are the most common type of account reported on the FBAR, other accounts, such as foreign retirement accounts, foreign annuities, or foreign mutual funds, must also be reported.
Note that foreign stock investments are not subject to FBAR reporting if they are held in a U.S. brokerage firm or bank but are subject to FBAR reporting if they are held in a foreign brokerage firm or bank. If your client owns the foreign stock as a direct shareholder and does not hold it through a brokerage firm, it does not need to be reported on the FBAR but does need to be reported on IRS Form 8938 (see below).
Filing the form is usually straightforward and involves reporting the amount in the accounts, but failing to do so correctly (or failing to do so at all) can result in significant fines. To ensure that your clients are compliant, you should know some of the most common filing errors.
3 Common FBAR Filing Mistakes
Failing to file because individual accounts are less than $10,000
Remember that the balance of all foreign accounts counts towards the $10,000 threshold. So if your client has two accounts with $6,000 each, they’ll still need to file an FBAR since the accounts add up to more than $10,000.
Forgetting about corporate accounts
Any account on which your client has signing authority, even corporate accounts, must be considered and counted toward the reporting threshold. So, for example, even if your client’s foreign accounts only total $5,000, if they also have singing power over corporate accounts that total $6,000, they will still need to report all of these accounts since the aggregate balance is greater than $10,000.
Using year-end account totals to determine reporting threshold
Even if your client’s foreign accounts don’t meet the reporting threshold at the end of the year, they may still need to file an FBAR. If the aggregate balance of their foreign accounts was greater than $10,000 at any point in the year, they must file an FBAR
How to File an FBAR for your Clients
Completing FinCEN Form 114 is similar to filling out any other tax form. You’ll need to know the maximum amount in each account during the calendar year and the name and address of each financial institution. The filing deadline is typically the same as tax day – April 15 (with an automatic extension to October 15). However, when it’s time to file the form, the process will be slightly different since it isn’t included in the tax return.
The form isn’t sent to the IRS but to the U.S. Treasury Department’s Financial Crimes and Enforcement Network. Since it is considered a BSA (Bank Secrecy Act) form and not an IRS form, it isn’t supported in your TaxSlayer Pro software. However, you can still easily file online using the BSA’s E-Filing System. You can file completely online or prepare the form as a PDF if you have Adobe Reader.
Don’t Forget to Register with the BSA
Individuals filing on FBAR on their behalf don’t need to register with the BSA, but tax preparers filing on behalf of a client do. So before you file an FBAR or any other BSA form, be sure to register with the BSA.
How Does IRS Form 8938 Differ from the FBAR?
IRS Form 8938 is the Statement of Specified Foreign Financial Assets and reports much of the same information as the FBAR. Unlike the FBAR, however, Form 8938 is included in the U.S. tax return and is supported by your TaxSlayer Pro software.
Since the filing thresholds for Form 8938 are much higher than the threshold for the FBAR, many people who file FBAR will not need to file Form 8938. However, some people mistakenly believe that if they file Form 8938, they no longer need to file an FBAR since the forms report similar information. This is untrue, and anyone filing Form 8938 must still file an FBAR. If you’re unsure whether your client needs to file a Form 8938 in addition to their FBAR, the IRS’s comparison of the two forms details their different reporting requirements.
Though FBAR isn’t technically a part of the U.S. tax return, it’s just as crucial as any IRS Form, and many tax preparers help their clients file it. After you’ve filed your client’s tax return, you can help them complete the FBAR on the BSA’s E-filing system.
This article was last updated on 01/09/2023.