U.S. residents and resident aliens who have any source of income from anywhere around the world must submit a report disclosing such information to the IRS. This includes income sources such as foreign trusts, foreign bank accounts, and foreign securities accounts. Failing to comply with this reporting requirement, known as the “FBAR” (Foreign Bank Account Report), can result in civil penalties. In more severe cases, an individual could face even harsher consequences. The question is, are nonresident aliens required to meet the same standards? If you need help filing an FBAR in California, ask the experienced Roseville tax preparers at Cook CPA Group about we can further assist you in a free consultation.
What is the FBAR?
The Foreign Bank Account Report (FBAR) is a report submitted to the IRS and required by the Bank Secrecy Act. It is also called FinCEN Form 114.
This report must be done by individuals who are on American soil and have assets overseas, such as bank accounts, among others. The IRS states: “If you have a financial interest in or signature authority over a foreign financial account, including a bank account… exceeding certain thresholds, the Bank Secrecy Act may require you to report the account yearly… by electronically filing” an FBAR.
The IRS highlights two criteria for FBAR filing requirements:
- “The United States person had a financial interest in or signature authority over at least one financial account… outside of the United States.”
- “The… value of all foreign financial accounts exceeded $10,000 at any time during the… year reported.”
For an FBAR filing, the IRS defines the term “U.S. person.” Under the IRS definition, this term includes U.S. citizens, residents, and various business entities, “including… corporations, partnerships, or limited liability companies, created or organized in the United States,” in addition to “trusts or estates formed under” U.S. law.
Are There Exceptions to FBAR Filing Rules?
Certain persons are excepted from filing an FBAR. According to the IRS FBAR guide, these persons include but are not limited to the following:
- Consolidated FBAR: A U.S. person who is an entity named in a consolidated FBAR filed by someone who owns more than 50% is exempted from filing an FBAR separately.
- Beneficiaries of Foreign IRA Accounts: The recipient of IRA account benefits is exempted from reporting an overseas financial account held in their IRA account.
- Beneficiaries of Tax-Qualified Retirement Plans: Participants and beneficiaries of qualified plans and tax-sheltered annuity plans are not required to report a foreign financial account held by the retirement plan.
Penalties for Failing to File an FBAR
Complying with yearly tax obligations is of utmost importance. Failing to file an FBAR when you should have can carry dire consequences. Penalties for noncompliance can range from civil penalties to criminal penalties or both. However, the imposition of sanctions is not automatic.
Individuals who realize they should have filed the report, or are late on their FBAR filing, can present a delinquent FBAR report by using the BSA E-Filing system online, provided the individual can submit an explanation for the delay in filing the report. If the IRS finds the individual had a reasonable cause for a late filing, the taxpayer may avoid penalization. However, it is never sure what the IRS will consider “reasonable,” which is one of the reasons it is crucial to consult with a Roseville tax accountant before proceeding.
What Are the FBAR Requirements for Nonresident Aliens in California?
Based on the definition set forth regarding U.S. persons, United States residents or resident aliens would have to file an FBAR report. But what does this mean for nonresidents?
In most cases, nonresident aliens are exempt from FBAR filing requirements. However, exceptions can arise if, for instance, the nonresident elects to be treated as a resident for tax purposes. In this type of tax situation, the IRS may require nonresidents to file an FBAR if they generate income from foreign assets exceeding certain thresholds. If the sum of your assets totals more than $10,000, you might be required to file an FBAR. Additionally, if you are a nonresident and have foreign assets, you could be expected to submit Form 8938 as part of the federal Foreign Account Tax Compliance Act (FATCA) requirements.
Keep in mind that these rules are continually changing – and you should always comply with the regulations imposed by the IRS.
CPAs Providing Tax Services in Roseville and Sacramento, CA
Filing an FBAR is vital for two main reasons. First, you must comply with the law, and second, failing to follow this mandate can result in civil and criminal penalties.
Navigating through this process can be confusing and difficult to handle on your own. Let the experienced Roseville and Sacramento CPAs at Cook CPA Group help you understand FBAR requirements in California, and whether they apply to you. To learn more about how we can help you in a free consultation, call (916) 724-1665 today.