In this video, Abhinav is decoding the rules for IRS FBAR Reporting in USA.
Video transcript below (kindly note auto-transcription can cause some errors)
Hello and welcome. In this video, I’m sharing the, reporting requirements by IRS, which is the foreign bank and financial reporting, requirements, which is FBAR reporting. I’m taking up the IRS, FBAR reference guide. This is available on the IRS website. I will also put the link in the description.
Right? So let us go through I’m just taking you through the main provisions that are there. So this is the table of contents, introduction, purpose, who must file the f bar. No. Basically, purpose.
The purpose of the f bar that is mentioned is that the for the US persons, right, who maintain overseas financial accounts. That means a person who is a resident of the United States and who maintains any financial accounts outside the United States. Any financial accounts located outside the United States. So, basically, there is an increased chance. So because, there is this increased chance of, the person not reporting the accounts, the income from those accounts to tax, this reporting requirement exists.
Right? So basically, who needs to file? Right? So basically, it is that US person must file an FBAR if they have a financial interest or a signature or other authority over any financial accounts outside the US and the aggregate amount of the accounts exceed $10,000 at any time during the calendar year. Right?
So first, it has to be a US person. Right? 2nd, the US person has to have a financial interest or a signature authority over a financial account. So we are talking here about financial accounts, not other accounts like real estate and everything. It has to be a financial account.
It has to be a US person. We’ll come to the US person. And there may be 2 things, either a financial interest in an account, that means you have a bank account in India, which is, like you have, like, 10 lakhs or 20 lakhs in that bank account, in a row in a row accounting, or it has it is like a signature authority over any financial account. Even though you don’t have any income from that account, but even a signature in that account, that also qualifies. However, the reporting requirement arises only when the aggregate of the amounts in the accounts is more than 10,000 exceeds $10,000 in a calendar year.
So the reporting is calendar year specific and $10,000 and above, if the, amount is there, only then the reporting gets triggered. Right? Now important thing to understand, it is only on US person. Who is a US person? I’ve made a separate video on the residential status under the US tax law.
US person here, the definition is a bit different from the definition, the for income tax for US income tax purposes. Here, it is a citizen or a resident of the United States. Citizen, that means a US citizen or a or a resident. Resident basically includes the two things. Either the person has a green card or the person, fulfills the substantial presence test.
That means, basically, 183 days in all 1, 2, 3, 3 years. So that is the requirement. So if you qualify that, then you then you are bound to report. If you are a non resident alien, you don’t qualify. You are neither a citizen nor the nor nor you are a green card holder, nor you are, following the substantial presence test, then you then this reporting requirement does not apply to you.
It’s only on the US persons. Now entity created, organized, or formed in the United States or under the laws. So for example, you have a LLC or a s corp in United States. You have created that. So that entity is also responsible.
That entity also qualifies as a US person for the reporting requirements. 3rd is an estate formed under the laws. So if you have an estate that is formed under the laws of the United States, that also qualifies as a US person for the reporting purposes. Now there is a provision on disregarded entities that US persons that are disregarded entities may need to file it. So disregarded entities may be a single example is a single member LLC, which is considered as a disregarded entity because the entire income from that, particular entity is taxed in the individual’s tax return.
So they also may need to file an FBAR. Right? Okay. So it says the federal tax treatment of an entity doesn’t affect the entity’s requirement to file an FBAR. So this is also important.
Right? So then there are the provisions that are given about whether a person is a resident or not. Right? I’m not going into the then there are even examples that are given so you can go through. Now coming to financial accounts, it says that a financial account include bank accounts.
For example, as a Indian person, if you are in Indian NRI, so it may be a NRO account, NRE account, any NRE time deposits. Right? Any deposits that you have with Indian banks. Securities, that means any brokerage accounts that you have in India. Right?
Any securities derivative, any financial instruments accounts. Right? Commodity futures options. Insurance. Insurance will only trigger where it has a cash value.
For example, if you have a term insurance in India, it will not qualify. It is only a whole a whole life insurance policy which has a surrender value or a maturity value that will only trigger a cash valuer. If the cash value is existing, then only it will qualify. Then mutual funds, even, like, for example, mutual funds. If you, have mutual funds in India, it will qualify.
Then, now important to understand here is that the fund should be available to public. Now, for example, if you talk about a PMS, in my view, given the provisions, PMS will not qualify. It has to be some some public kind of a fund should be available for public. Right? So only a mutual fund will qualify.
A PMS will not qualify for this reporting. It may it may qualify for other reportings, like form 8938, but not this reporting. Then any other account maintained in a foreign financial institution. Right? So now, for example, that is, like, given, like, Canadian registered retirement savings plan RRSP.
These are all included. For example, it’ll be in India, we have the, new pension scheme, national pension scheme, and NPS will qualify. A account will qualify. Right? Okay.
Now then for for an hedge funds or private equity, since these are private funds, they will not qualify. Right? Okay. So you need to be clear on what accounts you need to report. Right?
Okay. So there are certain examples that are given. Then maximum account value. So then there is a guidance on I will not go in-depth, or you can study this report. Study this guide, but I’m just taking you through the overview.
So how to calculate a maximum account value at any point in time during the year? The if the aggregate value is more than 10,000, then you need to be rip reporting it. Now, there is an example. So it is given that to determine the maximum value of a foreign financial account, first, determine the maximum account value in the currency of the account. Right?
For example, if it’s an Indian account, first, determine the value in the Indian currency, then convert 1st, determine the maximum account value. So, for example, the balance in a particular NRO account was 10 lakhs. INR, 10 lakhs. Right? So you determine in INR terms the maximum value.
Then you convert the maximum account value to for each account into US dollars using the exchange day exchange rate on the last so, for example, 2023, you are doing this reporting, then you calculate as on the last day, whatever is the exchange rate that is available. USD INR exchange rate as on the last day, then you convert it, right, in US dollars as on the last day to find out whether you breached the US dollars 10,000 threshold for the repurposes of it. So this is a this is slightly complicated. If you have too many accounts, then you might have to do some working in Excel to do this. The, the, to find out the, the US the exchange rate, there is a link that is given, treasury reporting rates of exchange.
This is a link which takes to the treasury website of the United States Treasury website, where you can actually find out what was the day on December 31, 2023, what was the date rate that was available. Right? So then now here are some examples that are also given that individually, the accounts may have balance less than 10,000, but at an aggregate level, at any time during the year, at an aggregate level, if it is more than 10,000 then you need to pay. Then it talks about that financial interest. Right?
For example, if you have, like, ownership in a trust or you hold power of attorney for on behalf of any other person, then also you need to report. And the other person, if the if you like, for example, you are holding a power of attorney. This example is given. John is a US citizen. His brother Paul maintains bank accounts in Mexico on behalf of John.
The accounts are held in Paul’s name, but Paul only accesses the account following the brother’s instructions. So in this case, John, since he has a financial interest in the Mexican bank accounts of Paul, John and John is a US citizen, John has to report in his FBAR reporting. Similarly, even if Paul is a US citizen or a US resident, even Paul will have to report the same accounts in his FBAR reporting. Right? So that is how the reporting both people have to report the same accounts in their individual reportings.
Right? Okay. Then talks about signature authority. For example, here, this example is given. Megan, as a US resident, has a power of attorney of her elder parents elderly parents’ accounts in Canada, but she never exercised power of attorney.
So even though you have never exercised the power of attorney or the incomes there are no incomes from that those accounts, still you have to report. So Megan must file an f bar if the power of attorney gives her signature authority over financial accounts. Whether or not Megan ever exercised authority is irrelevant. Right? Then there is this thing about jointly held accounts.
Right? So if there are 2 persons who join who hold joint, accounts, both have to report. Only exception here is available to a spouse, whereby one spouse, one spouse can re report the accounts of the other spouse, and there are other there are certain conditions that all financial accounts of the non filing spouse must report are jointly owned. Both all the accounts are jointly owned. Filing spouse reports the jointly account owns on a timely FBAR electronically signed, and both spouses have completed and signed form 114 a, which is the record of authorization to electronically file the FBAR.
So in if these three conditions are satisfied, then only one spouse can report the accounts, include the accounts held by the other spouse. Otherwise, both the spouses need to report individually the accounts, in their own, FBARs. Right? Now there are certain modified reporting requirements that have, that have a reason. Now take into account a person who has, like, 50 accounts.
Right? So in such cases, you have you can go in the FBAR report, in the in the when you file the report, there is an option to check mark. If you have a financial interest in 25 or more financial accounts, then you don’t need to individually report the account. Yes. There is a requirement to keep the proper records of the account because IRS can ask those from you, but you can just go ahead and tick the 25 or more checkbox.
Or if you have a signature authority, then you can tick the 25 or more checkbox. Right? Okay. Then there are certain relaxation. For example, if you, as an employee of a company which is not a resident of United States, if you are holding a signature authority, then only you need you need to just give a basic information so that relaxation is given.
Then there are certain filing exceptions, that means following persons are accepted. That means they do not need to file. For example, consolidated f bar, a US person that’s an entity named in a consolidated f bar filed by a greater than 50% owners. For example, I hold a LLC in USA, and I’m a single member LLC, and I hold, like, 100% ownership in an LLC. And if I reported that LLC, LLC’s assets, if LLC owns anything, in outside the United States, if I take care of that in my own individual reporting, then the LLC need not separately file.
Then there are, like, exemptions with respect to, IRA, owners. For example, an IRA owner holds any foreign accounts that needs not to be reported, or participants or beneficiaries offer tax qualified retirement plans, trust beneficiaries. So example, if the there is a beneficiary in the trust in which the beneficiary has a financial interest, Right? Doesn’t need to report the trust’s foreign financial account on an FBAR. If the trust trustee or the trust agent or the trust is a US person and files an FBAR.
So there are certain kind of relaxations that are given, exemptions that are given. Right? So okay. Then there are reporting requirements for so, basically, the reporting requirement is this that, you need to keep the, you need to keep the account the records of the accounts for 5 years from the due date of the report. So, for example, you have filed a report for 2023 calendar year on 2024, April 15, 2024, then 5 years from the due date, that is April till April 20 29, you’ll have to maintain the records.
Right? So those recording requirements are there. Then this is important that there are certain penalties. There are certain civil penalties, then there are certain criminal penalties. See, all the countries take foreign reporting very seriously.
For example, in India, we have the Black Money Act, and under the Black Money Act, you are required so there is no separate, as such, a reporting requirement in India. In India, you have to declare it as along with the in the tax return, there is a separate schedule, FSI and FA. Basically, the FA schedule, you need to disclose the foreign assets. If you don’t disclose, then there’s, like, a flat 10 lakh penalty plus, jail possibility of a jail term also is there. So basic point I’m trying to make is every country views foreign accounts suspiciously because in foreign accounts, there is this possibility of kind of stashing money in foreign accounts to escape the tax, pay payments in the host country in the resident country.
So similarly here also in US, they have a separate requirement to file an FBAR. So if you become a US NRI, if you are become a US resident, you are working in US, and you have financial interest in India, please take care to file this report every year. Now understand that this reporting requirement is separate from the, reporting of foreign accounts in, your 1040. Right? Your tax return.
That is separate. This is separate. However, you have to ensure that, Suraj, for example, you are reporting 5 accounts in the tax return, 1040 for an accounts, you have to also report, like, the 5 accounts here. So it should not be that you are reporting, like, 3 accounts there and 10 accounts here. It should not be a mismatch.
Ideally, you should try and, ensure that the same accounts are reported. If you are confused, then please take help of a tax professional or qualified tax professional, but don’t mess up on this. Right? Because there are penalties. There are civil penalties.
Now penalties are, like, $10,000 and above. So there are not like, it’s not kind of some small penalties there. It’s a big amount and which then, like, in case of willful nondisclosure of filing false FBARs, which the penalties are very, very high also, and, it also includes, like, 5 year prison term. Right? So you need to be very careful that you need file the proper FBARs.
Now if you so there are, categorizations, negligent violation, pattern of negligent equity, non willful, willful. So there are separate penalties. Right? Now, right. Now okay.
Due date. Okay. Earlier, there was a due date of, like, before 2015 or 2016, there was this due date of June 30th. But now the, the enforcement responsibility of this, reporting is with the IRS. So they have kind of, aligned it with the IRS tax return filing requirements.
So you need to file a tax return by April 15th. You need to also file the FBAR with by April 15th. Right? Now good thing about the f bar is that you get an automatic 6 months extension. Right?
So if you fail to file by April 15, 2024, right, you get a automatic 6 months extension to fill file by October 15, 2024. Right? So this is a great thing. Right? You don’t now for example, if you if you want to file a tax extension, you need to file a tax extension for the tax return.
Filer tax I have made a separate video on the, how to get a tax filing extension in US tax return. That, you need to manually file. Manually or electronically, you have to file. Here, it’s a automatic extension. So, basically, the effective date the actual effective date is October 15.
Right? By October 15, you need to fill. Now, here, if you see this guideline, it says that if the filer does not have all the information available to file the f bar or the automatic extension date of October 15, the filer should file as complete f bar as possible and amend. So there is in the electronic utility, there is a possibility to amend the f bar. So that option you have.
Right? So you can go ahead and amend, but, first, make sure that you file it by October 50. Now where to file? Now understand this. You don’t file it on the IRS website.
This requirement is different. You need to file it on the BSA file e filing system. So you go in the BSA e-filing system, and there you get 2 options. You can file it as a PDF. You can, like, work on a PDF, get the PDF ready, and then up validate and upload it electronically.
2nd is online e filing, whereby you it’s like in an online session, you update all the information. So what I personally prefer is the PDF version where you can fill it up as per your convenience and then upload the final PDF. But depending upon your choice, you can do. Right? Okay.
Then there is the if you have any queries, you can, there are helpline numbers that are given, so you can ask, in the helpline numbers. Right? Okay. So this was about, f bar. You need to as a US NRI, you need to be careful about what are the reporting requirements.
If you’re if you have, if you’re not clear, take help of a tax professional. If you have any queries, you can ask in the comment section, and I’ve helped you to the best of my ability. So this is it. I hope this video was useful. Thank you so much, and thank you so much.
Bye.