Understanding FBAR reporting requirements is of utmost importance. However, there are many myths out there that complicate the filing process. We have included here the top five myths we see regularly in our expat tax practice.
Myth #1 – Even if the foreign interest is held in my Individual Retirement Account (IRA), I still have to file an FBAR.
This is simply not the case. An owner or even a beneficiary of an IRA is not required to report a foreign financial account held in the IRA. Remember that an IRA is a tax deferred investment vehicle. Accordingly, you are not taxed on assets in the retirement account until they are withdrawn. Since the FBAR was established to (amount other things) look for taxpayers who are avoiding tax on current taxable income and reported assets, holding financial accounts in an IRA will not create a filing requirement.
Myth #2 – I have a controlling interest in a corporation that has a foreign financial account. As long as the corporation reports the foreign account on an FBAR I don’t have to.
This one is confusing for many folks, but it is just a myth. If a person who holds legal title (either directly or indirectly) to either more that 50% of the total value of any shares outstanding or more than 50% of the voting power of the shares then the individual owner must file an FBAR in addition to the corporation filing an FBAR. This one may not seem like it makes a lot of sense because it requires two FBAR filings for the same account. Unfortunately, that is how the law was written
Myth #3 – The FBAR filing is due with my tax return and the due date is April 15th.
The FBAR is actually not required to be filed with the tax return. The FBAR is a calendar year report and must be filed with the Department of Treasury by June 30th of the year following the year that is being reported. There is no ability to file an extension for the FBAR. However, it may be amended if subsequent information is discovered that is required to be reported.
Myth #4 – I don’t have an FBAR filing requirement if I just have signature authority or a power of attorney of the financial accounts.
This is another tricky one. If someone has signature authority over to control the disposition of assets held in a foreign account then an FBAR is required by that individual. For example, many folks may have a power of attorney for elderly relatives who have accounts in foreign countries. Even though the power of attorney may never be exercised, an FBAR is still required by the person holding the signature authority.
Myth 5 – I don’t have to file an FBAR if I hold multiple accounts and each account is below the $10,000 filing threshold.
Again, this is just a myth. The FBAR filing is required if the “aggregate” balances in the accounts exceed $10,000. This can make the reporting very cumbersome and result in extensive reporting costs if many accounts are held overseas.
FBAR filings can be tricky so make sure that you understand when a filing is required. There is a lot of misinformation which can result in plenty of confusion. A qualified tax professional can walk you through the filing requirements and prevent you from getting into trouble with the IRS.