White Paper: Q&A: Foreign Financial Account Reporting

by Jennifer Gaitsch-Aguirre

Foreign financial account reporting, despite existing for years, came into the spotlight in 2014 due to the implementation of FATCA, the Foreign Account Tax Compliance Act. While the act became law in 2010, its main provisions, which require foreign financial institutions to disclose information about U.S. customers, did not come into force until July of 2014. With the disclosure of accounts held in foreign financial institutions eminent, many U.S. taxpayers became aware–many due to letters from their foreign banks—that they had a filing requirement with the Department of Treasury, specifically the Financial Crimes Enforcement Network (FinCen).

Determining who and what needs to be reported can be difficult, even for the savviest tax accountant. Below are the quick who, what, where, when, why and how of foreign financial account reporting.

Who must report foreign financial accounts?

Any U.S. person who has a financial interest in or signature authority over foreign accounts with an aggregate value greater than $10,000 must report the account(s). A U.S. person can be an individual (either a U.S. citizen or resident), trust, estate, or any legal business entity.

As one might expect, financial interest means ownership by a U.S. person, but it can also include indirect ownership. For example, ownership can be attributed to an individual through a business entity in which they are a 50%, or greater, owner.

Signature authority refers to the ability to control the disposition of assets held in the foreign account. While the U.S. person does not legally own the foreign account, they are capable of controlling it through communication with the foreign financial institution, which includes electronic funds transfers.

What must be reported to FinCen?

Foreign financial accounts can include, but are not limited to, a simple checking or brokerage account. They can also include accounts as complex as commodity futures, life insurance policies, even foreign retirement accounts.

Where does the account have to be held in order for it to be reported?

For an account to be reportable it must be located outside of the U.S. If the account is held in a branch of a U.S. bank located outside of the U.S., it must be reported. On the contrary, accounts held in a U.S. branch of a foreign bank need not be included.

When do the accounts need to be reported?

Foreign financial accounts must be reported when all said accounts owned by a U.S. person have aggregated balances, at any point during the year, greater than $10,000. Each account must be assessed individually for its highest daily balance and those balances are combined to determine if the $10,000 threshold has been exceeded. For example, if the U.S. Person has 10 accounts, with $1,000 maximum balances, at various times during the year, that U.S. Person has a filing requirement. You are required to use the most detailed information available to determine the maximum value of an account; however, quarterly or annual account statements may be relied upon, if needed.

Why should the accounts be reported?

There are multiple reasons that the accounts should be reported, most importantly because it’s the law. The penalties for not reporting when required are substantial. The penalty can be $10,000 per year, per unreported account, and if the non-reporting violation is considered willful, the penalty leaps to the greater of $100,000 or 50% of the account balance.

This information is collected for the same reason that the Department of Treasury collects information about cash transactions in excess of $10,000: to combat money laundering, terrorist financing, and tax evasion. As a result, noncompliance is pursued aggressively by the Treasury and penalties are severe.

How must the accounts be reported?

The accounts must be reported on FinCen Form 114. Starting in 2017 Form 114 for the year 2016 must be electronically filed by April 15th, and a 6 month extension ending October 15th will be allowed for the first time. The new due date and extension are designed to allow taxpayers to report these assets on FinCen Form 114 and their tax returns more easily.

For taxpayers with international assets, the filing requirements can be complex. In addition to Form 114, there are a number of other disclosures that may be required with your income tax return, and they carry their own stiff penalties.

The above should provide insight into the complexity of foreign financial account reporting, as well as its importance. If you believe you may be required to report a foreign financial account, it is imperative that you consult a knowledgeable international tax advisor.