International Financial Reporting
Learn more about the additional reporting requirements Congress has implemented with respect to certain foreign activities.
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Foreign Bank and Financial Accounts Reporting (FBAR)
The Currency and Foreign Transactions Reporting Act of 1970, commonly referred to as the “Bank Secrecy Act,” requires U.S. financial institutions to assist U.S. governmental agencies in detecting and preventing money laundering. The regulations that govern the Bank Secrecy Act are issued by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN). These regulations require all financial institutions to submit five types of reports to the U.S. Government:
- Currency Transaction Report
- Report of International Transportation of Currency or Monetary Instruments
- Suspicious Activity Report
- Designation of Exempt Person FinCEN Form 110
- Report of Foreign Bank and Financial Accounts (FBAR)
Of all the reports, the FBAR has recently garnered the most attention. Not only do U.S. financial institutions have a requirement to file a FBAR, each U.S. person having a financial interest in, or signature authority over, a bank account, securities or other financial account in a foreign country must report such relationship to the Commissioner of Internal Revenue for each year in which such relationship exists [and the aggregate value of the accounts exceeds $10,000] and must provide such information as shall be specified in a reporting form prescribed under 31 U.S.C. 5314. The reporting form, FinCEN 114, is due April 15th of the calendar year following the calendar year being reported.
The following terms related to FBAR qualifications are detailed in 31 CFR §1010.350.12
United States Person (U.S. person)
U.S. persons are required to file FinCEN 114, provided they meet the qualifications prescribed above. A U.S. person is defined by the regulations as: (1) [a] citizen of the United States, (2) [a] resident of the United States, or (3) [an] entity including, but not limited to, a corporation, partnership, trust, or limited liability company created, organized or formed under the laws of the United States, any State, the District of Columbia, the Territories and Insular Possessions of the United States, or Indian Tribes.
The regulations define reportable accounts as bank accounts, securities accounts and “other” financial accounts. Bank accounts are defined under the regulations as savings deposit, demand deposit, checking or any other account maintained with a person engaged in the business banking. Securities accounts encompass those accounts with a person engaged in the business of buying, selling, holding or trading stock or other securities. Various examples of “other accounts” are listed in the regulations. With respect to whether an account is a reportable account, the reporting requirements do not apply to, among other examples, accounts of international financial institutions of which the U.S. government is a member.
Another issue to consider to determine if a financial account is a reportable account is to analyze its location to determine whether it is located in a foreign country. A foreign country includes all geographical areas located outside the United States, as defined in the regulations. By way of example, if a U.S. person maintains a foreign financial account with a branch of a U.S. Bank that is physically located outside of the United States, that account is a reportable account. Alternatively, if a U.S. person maintains a foreign financial account with a branch of a foreign bank that is located in the United States, that account is not a reportable account.
Financial Interest In or Signature or Other Authority
One of the most confusing elements of the reporting requirements is for a U.S. person to determine whether he/she has a financial interest in or signature authority over a foreign financial account. At a minimum, a U.S. person has a financial interest in a foreign financial account if he or she is the owner of record or the holder of legal title. Additionally, a financial interest can be created by way of a person’s status as a constructive owner of a foreign financial account. Generally, a constructive owner is a person acting on behalf of a U.S. person with respect to the account. A U.S. person can also be a deemed owner of a foreign financial account. The regulations further elaborate on which persons may be a deemed owners of a foreign financial account.
A U.S. person has signature or other authority over an account if that person controls the disposition of money, funds or other assets held in a financial account by direct communication to the person with whom the financial account is maintained. There are many exceptions to this requirement, which apply to officers and employees of financial institutions that have federal functional regulators. The regulations include a list of the specific exceptions.
If U.S. persons meet all the requirements described above, these individuals are required to file FinCEN Form 114 if, at any point during the calendar year, the aggregate value of their accounts exceeds $10,000. When aggregating accounts, the maximum value of each account is added together. If a foreign financial account is reported in a foreign currency, it must be translated into U.S. dollars at year-end using the U.S. Treasury’s Reporting Foreign Exchange Rates.
Foreign Account Tax Compliance Act (FATCA)
In 2010, Congress passed the Foreign Account Tax Compliance Act (FATCA), which requires “specified persons” to file an information return, Form 8938, with their annual federal tax returns for any year in which their interests in foreign financial assets exceed the applicable reporting threshold.
Specified persons must determine their filing requirements based on the threshold amounts as determined by the IRS. Generally, aggregate value of these assets must exceed $50,000, but in some cases, the threshold may be higher.
All values must be determined and reported in U.S. dollars on Form 8938. For accounts that are reported in foreign currency, the value is converted into U.S. dollars at year end using the U.S. Treasury’s Reporting Foreign Exchange Rates.
Per the instructions to Form 8938, specified persons have an interest in a specified foreign financial asset if any income, gains, losses, deductions, credits, gross proceeds or distributions from holding or disposing of the asset are (or would be) required to be reported, included or otherwise reflected on their income tax returns.
There are two types of specified persons:
- A specified individual is any one of the following:
- A U.S. citizen
- A resident alien
- A nonresident alien who makes an election to be treated as a resident alien for purposes of filing a joint income tax return
- A nonresident alien who is a bona fide resident of Puerto Rico or a U.S. possession.
- A specified domestic entity is a domestic corporation, a domestic partnership or a trust, if such corporation, partnership or trust is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets. Whether a domestic corporation, a domestic partnership or a trust as described is a specified domestic entity is determined annually. [IRC Section 7701(a)(30)(E)]
“Financial account” and “foreign financial institution” are given their meanings consistent with those described in IRC Section 1471, relating to withholding requirements on payments to foreign financial institutions. Generally, stock or security issued by a person other than a U.S. person or any other interest in a foreign entity is a foreign asset if it is held for investment. One important distinction with the investment rules is to determine whether the asset is held for investment or held for use in the conduct of a trade or business of a specified person. Any assets held for use in the conduct of a trade or business of a specified person will not qualify as a foreign financial asset and, thus, will not subject the specified person to a filing requirement.