The Bank Secrecy Act of 1970 equipped the U.S. Treasury Department with the authorization needed to collect and analyze a taxpayer’s information about their financial transactions abroad in order to curtail domestic and international money laundering abuse and other financial crimes. The collection of taxpayer information is accomplished through the Financial Crimes Enforcement Network (FinCEN) and administers the enforcement of reporting through the U.S. Internal Revenue Service. Thus, the Secretary of the Treasury is delegated with the authority to both administer civil compliance and enforce the criminal provisions under Title 31 of the U.S. Code of Federal Regulations.

U.S. Tax Payer Reporting Requirements

A U.S. Person (U.S. citizens, resident aliens, trusts, estates, and domestic entities) are required to disclose and report information about their foreign financial interest during the year if the aggregate value* of the accounts exceeds $10,000 at any time during the calendar year. This requirement includes resident aliens of U.S. territories such as Puerto Rico, Guam and the US Virgin Islands.

*Aggregate Value is a cumulative balance approach. A taxpayer that holds two (or more) foreign accounts with a combined balance greater than $10,000 at any one time must report ALL of the  accounts. This is reported by the taxpayer on an annual basis converted into U.S. dollars using the year-end exchange rate.

Jointly owned accounts

Generally, each owner of a foreign financial account must file a Foreign Bank and Financial Accounting Report (FBAR) however, if the joint ownership is between husband and wife then the rules change. Only one spouse is required to report on the FBAR provided certain requirements are met. 

Imputed Ownership

The IRS may assert that a financial account is deemed to be owned by a U.S. person if that person holds a stock ownership of 50% or more of a U.S. Corporation or Foreign Corporation that has an interest in a foreign financial account. The IRS also extends the deemed ownership rules to a partner in partnership who owns 50% or more of the profits or a 50% interest in the partnership.

Penalties for Failure to Report

Failure to report the foreign financial interest** under the FinCen reporting requirements falls under two different categories: willful and non-willful negligence. 

If the IRS determines the failure to report as non-willful offense, then there is $10,000 penalty assessed to the taxpayer. A non-willful violation may be qualified for exception if the failure to report is for any reasonable cause accepted by the IRS.

On the other hand, if the IRS determines the reporting failure to be willful negligence the penalty increases to the greater of $100,000 or 50% of the account balance. There is no reasonable cause exception for willful violation.

**Foreign financial Interest is defined by the Internal Revenue Service (IRS) as being the beneficial owner of the foreign account. That means you are the holder, have signatory authority and control over the account with the ability of direct communication with the financial institution over disposition of funds contained in that account. The IRS further defines a financial Interest to include savings accounts, custodial accounts including foreign stocks or securities and foreign mutual funds. The IRS defines foreign as being physically located in the country outside the U.S.

With the significant penalties imposed for failing to file the FBAR, it is important to have a knowledgeable team on your side. With over 15 years experience, Kaufman Accounting can help assess the filing requirements specific to your individual needs to help ensure you are in compliance. Contact us today for to schedule an introductory meeting!

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