Foreign investment accounts are maintained by U.S. persons for many legitimate reasons. This includes diversification, convenience for certain people along with access. But many foreign financial institutions are not subject to reporting requirements that are comparable to US based financial institutions. Hence, the U.S. government has established FBAR reporting.
Unfortunately, many expats (and even US residents) are required to file annual FBARs. However, there are some tips and ways to structure your assets so that you can avoid an FBAR. Here will take a look at a few ideas whereby you can eliminate the filing requirement.
Secret #1 – If the foreign account interest is held in an Individual Retirement Account (IRA), there is no filing requirement.
Many taxpayers don’t realize that this is the case. An IRA is a tax deferred account and funds are only taxed when they are withdrawn or distributed. So one may consider holding financial accounts in an IRA and maintain after-tax accounts domestically. Obviously, this should be viewed in conjunction with an overall financial plan. But if it can be accomplished it will certainly streamline filing requirements.
One thing we are starting to see a lot of is Self-directed IRAs (“SDIRA”). Many taxpayers are getting bored with traditional investments (stocks, bonds, mutual funds, etc) and are searching for alternative investment ideas. This is typically done in search of higher returns and lower volatility.
SDIRAs are certainly a great option when it comes to holding foreign investments because not only can you avoid the FBAR filing requirement but you are offered such a wide variety of investments. SDIRAs can invest in almost anything, except for S-Corp stock, life insurance products, along with certain types of collectibles. The big issue that we see is that there is often confusion and misinformation when it comes to SDIRA tax rules. In addition, many CPAs don’t understand the tax rules associated with them so they become underutilized. It’s not that CPAs and tax professionals are naive to the issues it’s just that they don’t see them very often in their practices.
Secret #2 – Maintain balances in foreign accounts that don’t meet the $10,000 aggregation level.
This seems pretty basic. But you would be surprised how many FBARs we file for individuals (and business owners) who maintain minimal overseas account balances. You should really take a close look at the reason you have foreign accounts. Are they really necessary? Are you accomplishing your financial goals? In many cases it just does not make a lot of sense.
We had a client who came to us recently when he determined that he had an FBAR filing requirement. He probably had a net worth of around $2 million. But the amount that he had in overseas bank accounts was a mere $12,000. When questioned why he had such a small amount he stated that his father had died many years back and he inherited the account and just had forgotten about it. So at this point he was left with filing back FBARs and possibly amending personal tax returns. He faced penalties and filing costs…all for just $12,000. Doesn’t seem worth it to me.
So the moral here is that you need to take a close look at why you have these accounts and what purpose they serve. You may find that the money is better off in a U.S. financial institution so you can avoid any FBAR headaches.
Secret #3 – Maintaining accounts in a qualified trust will not generate a filing requirement for the beneficiaries.
A trust beneficiary who holds a direct or indirect interest in more than 50 percent of the trust assets or income in the trust is not required to report the trust’s foreign accounts if the trust, trustee of the trust, or relevant agent of the trust is a U.S. person and files an FBAR that discloses the relevant financial accounts.
As American citizens you need to understand FBAR requirements. However, if you can restructure your assets to avoid the filing requirements then that may save you some time, money and aggravation. The key to compliance is knowledge.