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If you’re a U.S. business owner with financial interests abroad, navigating tax compliance can be a challenge. Whether you hold funds in a foreign bank or manage assets overseas, the IRS requires you to meet specific reporting obligations. In this post, we’ll cover what business owners need to know about reporting foreign bank and financial accounts, particularly the requirements under the Foreign Bank and Financial Accounts (FBAR) regulations, as well as potential penalties and compliance strategies.
What is FBAR?
The Foreign Bank and Financial Accounts Report (FBAR) is a legal requirement under the Bank Secrecy Act. U.S. citizens, residents, and certain entities must file an FBAR if they have a financial interest in or signature authority over foreign financial accounts that meet specific thresholds. The main goal is to prevent tax evasion by requiring full disclosure of foreign accounts.
Who Needs to File an FBAR?
As a business owner, you are required to file an FBAR if:
- You have a financial interest in or signature authority over at least one foreign financial account.
- The aggregate value of all foreign accounts exceeds $10,000 at any point during the calendar year.
This requirement applies to individuals, partnerships, corporations, trusts, and estates formed in the U.S. Importantly, this includes entities like LLCs and corporations, not just personal accounts.
What Counts as a Foreign Financial Account?
A foreign financial account includes, but is not limited to:
- Bank accounts (savings, checking)
- Brokerage accounts
- Mutual funds
- Trusts or other types of foreign financial assets
Note: Foreign assets held in domestic accounts, such as in a U.S.-based brokerage firm, are generally exempt from FBAR filing requirements.
Filing Exceptions
Certain U.S. persons and financial accounts are exempt from filing an FBAR. For example:
- U.S. military banking facilities
- Foreign financial accounts held by government entities
- Individuals who are beneficiaries of U.S.-based IRAs or tax-qualified retirement plans
For business owners, if your foreign accounts are jointly owned with your spouse, only one FBAR filing is required, provided that one spouse files on behalf of both.
Penalties for Non-Compliance
The penalties for failing to file an FBAR can be severe, particularly for willful violations. For non-willful violations, the penalty is up to $15,611 per violation. For willful violations, the penalty can be the greater of $156,107 or 50% of the balance in the account at the time of the violation.
Note: If it’s your first time filing an FBAR and you have reasonable cause for not filing earlier, the IRS may waive penalties.
Filing Process
FBAR filings must be submitted electronically through the Financial Crimes Enforcement Network (FinCEN) BSA E-Filing System. Unlike other tax filings, the FBAR is not submitted with your federal tax return. The standard filing deadline is April 15, but an automatic extension to October 15 is available.
Form 8938: Additional Reporting Requirement
In addition to filing an FBAR, U.S. taxpayers with specified foreign financial assets may also need to file Form 8938, “Statement of Specified Foreign Financial Assets.” This form is required if the total value of these assets exceeds certain thresholds. For example, for U.S. residents:
- Single filers: More than $50,000 on the last day of the tax year or $75,000 at any time during the year.
- Married filing jointly: More than $100,000 on the last day of the year or $150,000 at any time during the year.
Form 8938 is filed with your annual tax return, and failure to file can result in significant penalties—up to $10,000 initially, and up to $50,000 for continued non-compliance.
Final Thoughts
Failing to comply with FBAR regulations or Form 8938 requirements can result in hefty penalties, but with proper planning and timely filing, these risks can be mitigated. If you’re a business owner with foreign financial accounts, it’s crucial to stay ahead of these reporting requirements.
Don’t let foreign account reporting obligations take you by surprise—plan ahead and consult with a tax professional to ensure you meet all compliance requirements. For more information, visit the IRS website or speak with a tax advisor experienced in international tax matters.
By staying informed and taking the necessary steps, you can avoid unnecessary penalties and keep your business in good standing with the IRS.
