In this earlier post, we have discussed about FATCA and CRS and why US NRI need not fear these new developments as long they are assessing their tax residency properly, offering full income in their tax returns and filing proper reports with the IRS.
Speaking of reports, there are two main reports that a US person needs to file to IRS, and those are Foreign Bank Account Report (FBAR) – (also known as Fin Cen Report 114) and Form 8938 – Report on Specified Foreign Financial Assets
(Also read: IRS Form 8938 Reporting by US-based NRI)
In this post, I am explaining broad provisions and requirements of FBAR so that the US based NRIs are fully compliant on their IRS obligations & get a good night’s sleep tooJ
Purpose
The requirement of filing this report arises from the Banking Secrecy Act which authorises the IRS to collect information from United States persons who have financial interests in or signature authority over financial accounts maintained with financial institutions located outside of the USA. The aim of this reporting is to prevent offshore tax evasion (i.e. where US persons do not disclose income from foreign accounts in tax return)
Who needs to file FBAR
A person has to fulfil following criteria to be covered under this requirement:
- He is a US person (means US citizen living anywhere in the world, resident alien or a non-resident alien electing to be treated as resident alien for tax purposes) – Also read: How to calculate Residential Status for tax purposes in USA
- Person has a) financial interest in or b) signature authority over at least one financial account outside of the USA
- The aggregate maximum value of all accounts taken together exceed $10,000 at any time during the calendar year (USD 10,000 ~ INR 8.30 lacs, as per present INR/USD rate of 83)
Some examples:
- Rajesh is an Indian citizen who is working in USA for past 3 years on H1B visa. He has an NRO account, NRE account and some mutual funds which had maximum balance of Rs. 2 lacs, 4 lacs and 3 lacs in the last calendar year. Since the total of the maximum balance in all accounts exceed USD 10,000, he is required to file an FBAR.
- Nipun is an Indian citizen who is working in USA for past 2 years on L1 visa. He had NRO account having a balance of Rs. 10 lacs but he closed it on Nov 28, 2015. Since the maximum balance in this account exceeded USD 10,000 at “any time during calendar year”, he is required to file an FBAR irrespective of the fact that he does not have this account at the end of the year.
Meaning of “financial account”
As per the IRS FBAR guide, financial account means a financial account located outside USA includes the following types of accounts (I’ve inserted my comments/thoughts at appropriate places):
- Bank accounts such as savings accounts, checking accounts, and time deposits (note: so all your NRE, NRO, FCNR, RFC savings accounts, fixed deposits etc. with Indian banks will be included here)
- Securities accounts such as brokerage accounts and securities derivatives or other financial instruments accounts, (e.g. include your PIS demat accounts in India)
- Commodity futures or options accounts
- Insurance policies with a cash value (such as a whole life insurance policy), (note: exclude policies like term life, health, car etc. which do not have any cash value. Include your traditional and ULIP policies – LIC policies will qualify)
- Mutual funds or similar pooled funds (note: your Indian MF investments will qualify)
- Any other accounts maintained in a foreign financial institution or with a person performing the services of a financial institution (here all balance accounts will come – for example, an NPS, PPF, etc.)
Example: Prashant is a USC & he invested in Matthews India Fund, which is a USA based dedicated India fund. He is not required to report this account because Matthews is a USA account. However, if he would have invested directly with say PPFAS Mutual Fund in India, he would have to report PPFAS MF account in FBAR.
Also note the below rules on this point:
- Account maintained with a branch of a United States bank that is physically located in India is a foreign financial account (for e.g. an NRO savings account in Citibank USA’s Indian branch will qualify)
- Account maintained with a branch of a French bank that is physically located in Texas is not a foreign financial account.
- So, from the above, we can see that real estate, gold or any other assets like art, collectibles, jewellery etc. held directly will not qualify as “financial account” for FBAR purposes.
- If the aggregate maximum balances in all accounts exceed USD 10000, you have to report ALL such financial accounts in FBAR, even though some accounts individually have less than USD 10000.
- In case you hold a joint account with spouse or a third party, you will have to consider full amount of the account as your asset for FBAR purpose. There is an exception for joint holding by spouses where one spouse is exempt from filing the FBAR, but this is subject to conditions.
- Apart from owned accounts, those accounts where you have a financial interest (e.g. as a beneficiary of a trust) or as a signatory also need to be taken into account. There is an exception for beneficiary to file FBAR if he holds >50% in trust and trust files an FBAR
How to determine “Maximum Account Value”
As per the IRS guidance, you will have to take out the highest amount at any time during the financial year by relying on the periodic statements from the bank/FI. For e.g. for all your bank accounts in India, take a print of the statement from Jan 1-Dec 31. Similarly for MF, Demat and NPS, you can take out the statements provided by the AMC/broker/NPS trust respectively.
Note that you have to find out the aggregate maximum balance at an INR level first, and then convert into USD as per rates prevailing as on the last day of calendar year (refer this link)
Where to file
The report has to be filled online at the BSA E-Filing System. When you go to this website, you can download the filing instructions. Also, there is an option to either file it online or file it offline and then upload the same on the website later. Note that the filing of foreign accounts information in tax return 1040 is a separate & independent requirement and should not be confused with FBAR.
Filing timeline
For a calender year, the report has to be filed by April 15 of the next calendar year. For example, report for calendar year 2023 needs to be filed by April 15, 2024. You’re allowed an automatic extension to October 15 if you fail to meet the FBAR annual due date of April 15. You don’t need to request an extension to file the FBAR. So effectively you have time till October 15 to file a FBAR for a particular year. IRS rules further say that if all information is not available for filing by October 15, one should file by whatever information is available as on October 15 and later on amend the FBAR as new information is received.
Penalty for non-filing & failure to keep records
Different civil and criminal penalties are applicable depending upon whether the violation was negligent or wilful. For example, knowingly filing false FBAR can lead to $ 10000 fine and 5 years jail or both.
What to do if you have missed earlier year filings?
So, this is the real question. Once you know of this requirement & don’t want to get into the IRS tangle, what to do to regularise everything. Good news is that IRS is not very punitive on late filings and allows a person to file for previous years after selecting a reason from the drop down (like not aware of requirement, forgot to file etc.)
When you come to know that an FBAR should have been filed for a previous year, you should not delay further & electronically file the delinquent FBAR report on the BSA E-Filing System website. In the calendar year, you can select the year for which you are filing the report.
You get an option to “explain a late filing” or to select “Other” to enter up to 750-characters within a text box where the filer can provide a further explanation of the late filing or indicate whether the filing is made in conjunction with an IRS compliance program.
Other important points on FBAR:
- As per regulations, you need to maintain a record for each FBAR for five years from its due date
- Your residential status chosen under DTAA does not impact this filing requirement. For e.g. If you’re a US resident alien and elect to be treated as an Indian resident under Article 4 of India USA DTAA, still you will fall in purview of FBAR if maximum value of your funds in Indian accounts cross USD 10,000 at any time during the USA calendar year.
- FBAR reporting obligation is INDEPENDENT of tax return filing and Form 8938 reporting requirements. That means, even if you are not required to file a tax return for the year, or you do not qualify for Form 8938 reporting, YOU STILL NEED TO FILE FBAR if you meet the conditions outlined above.
- Apart from FBAR, you also need to provide information on foreign accounts in tax return 1040 in Schedule B questions 7a and 7b
- If you’re also required to file a tax return to IRS, ensure that at the time of filing FBAR, the details given in FBAR match the details filled in Schedule B of Form 1040 which relates to questions about foreign assets.
- When filing FBAR, ensure a three way check between details filled in FBAR, Schedule B of Form 1040 and Form 8938 to ensure consistency.
- In case of delinquent FBAR filing, if you’ve failed to disclose the income from the foreign financial accounts in your earlier year tax returns, also amend the tax return in Form 1040X to show the correct income & also pay tax and interest on it.
References and Additional Reading: FBAR resource page on the IRS website
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