By Jennifer Mace, CPA
In today’s increasingly global economy, there are many U.S. tax-reporting requirements that relate to foreign investments, foreign organizational operations, and other international transactions. One of these requirements is the Report on Foreign Bank and Financial Accounts (FBAR).
While the reporting requirement has been around for decades, IRS scrutiny and compliance efforts have been a focus since 2004, when Congress passed stronger laws to strengthen the penalties for non-filers in the wake of the 9/11 attacks. As part the FBAR evolution, the IRS announced changes to the filings, effective for 2016 filings due in 2017.
The purpose of the FBAR (now filed electronically via Form FinCEN 114) is to disclose accounts for any US person who has a financial interest in, or signature authority over, foreign financial accounts with an aggregate value that exceeds $10,000 at any time during the calendar year.
While this may seem fairly straightforward, the definitions for each of these pieces can become complex. For example, foreign financial accounts include more than just the standard checking and savings accounts. In addition to the types of accounts listed above, it can also include indirect financial interest (generally greater than 50% ownership is required).
For example, if individual A owns 51% of Company B, which has a foreign financial account in Canada, both Individual A and Company B are considered to have a financial interest in the underlying account.
Another area that can cause confusion is “signature authority.” What does this mean? The basic definition is not entirely useful, but the IRS does lend some guidance.
An individual is considered to have signature authority if the individual (along with, or in conjunction with, another individual) is authorized and able to control the disposition of assets held in a foreign financial account.
To break this down, if a controller of ABC Co. is able to pay invoices for foreign activities and operations by transferring money to and from the company’s foreign bank account without the approval of the CFO; this is a form of signature authority. The controller may not be listed on the bank account, but still has the authority to control the flow of funds via online access that is granted by the company.
Another example of signature authority occurs when an individual has a power of attorney for an elderly family member’s accounts in a foreign jurisdiction. This individual does not need to have ever exercised the power of attorney. Whether or not authority is exercised is generally considered irrelevant for purposes of the requirement to disclose.
So, what has actually changed? The biggest change is the due date. The due date is now April 15 of the year following the calendar year close. For 2016 filings, it will coincide with the federal IRS filing deadline of April 18, 2017.
The new law also includes a possible six-month extension to October 15, which has not previously been available to taxpayers. Up until recently, the six-month extension authority given to the IRS was not finalized. However, the IRS released a statement in the past few weeks that provides filers with an automatic extension to October 15 each year. Specific requests for the extension will not be required. This will allow taxpayers additional time, if needed, to gather the foreign bank account information required to be disclosed.
This new deadline is for everyone: businesses, individuals, and non-profit organizations, alike. The due date coordinates primarily with the individual and corporate tax deadline, but will be the same for all filers. As has been the case historically, the filing is based on a calendar year, regardless of the year-end of the filer.
The FBAR filing requirements can have nuances. If you have questions or concerns, please contact your Clark Nuber tax advisor.
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