The Report of Foreign Bank and Financial Accounts, FinCEN Form 114 (a/k/a FBAR) is arguably the most important information return concerning foreign accounts. Its importance stems first and foremost from the extremely severe Form 114 penalties, which range from criminal penalties of up to 10 years in prison to willful and even non-willful penalties that may exceed the value of the penalized accounts. Given these penalties, it is important to understand who the FinCEN Form 114 filers are – i.e. who is required to file Form 114?
For today’s purposes, I will concentrate only on the individual FinCEN Form 114 filers.
FinCEN Form 114 Filers: General Definition
At the center of the definition of FBAR filer is a United States person (“US person”). A US person must file FinCEN Form 114 if he has a financial interest in or signatory authority or any other authority over any foreign financial accounts and the aggregate maximum value of these accounts exceeds $10,000 at any time during the calendar year.
FinCEN Form 114 Filers: Main Categories of US Persons
Under the 31 CFR 1010.350(b), the definition of a US Person is very specific and consists of five main categories: (1) a citizen of the United States; (2) a resident of the United States; (3) an entity created or organized in the United States or under the laws of the United States; (4) a trust formed under the laws of the United States; and (5) an estate formed under the laws of the United States. As I stated above, today, I will focus only on categories 1 and 2; I will deal with business, trust and estate FinCEN Form 114 filers in other articles.
FinCEN Form 114 Filers: US Citizens
This is by far the easiest category of FinCEN Form 114 filers to analyze. If an individual is a US citizen and has foreign accounts that exceed the filing threshold, then, he must file Form 114.
FinCEN Form 114 Filers: Definition of “Residents of the United States”
In the context of FBAR compliance, a “resident of the United States” has a special meaning which corresponds for the most part, but not exactly, to the US income tax definition of a tax resident. There are three distinct categories of individuals who fall within the definition of a “resident of the United States” for FBAR purposes: US permanent residents, persons who satisfy the Substantial Presence Test, and certain non-resident aliens who make the first-year election to be treated as US tax residents. Additionally, Internal Revenue Code (“IRC”) §7701(b)(2) contains a number of provisions that regulate when individuals are considered to be US residents for FBAR (as well as income tax) purposes during the first-year and the last-year of residency.
FinCEN Form 114 Filers: US Permanent Residents
The first category of residents of the United States is not complex. All US Permanent are US persons and, if they have foreign accounts that exceed the FBAR filing threshold, also FinCEN Form 114 filers.
FinCEN Form 114 Filers: Substantial Presence Test
The second category of residents of the United States for FBAR purposes are the individuals who satisfied the Substantial Presence Test described in IRC §7701(b)(3). Under the Substantial Presence Test, an individual is a US person if: (1) he was present in the United States (as defined under 31 CFR 1010.100(hhh)) for at least 31 days during the calendar year in question; and (2) the sum of the number of days on which such individual was present in the United States during the current year and the two preceding calendar years equals or exceeds 183 days. The amount of days in the two preceding years should multiplied by the applicable multiplier as follows: first preceding year – one-third; second preceding year – one-sixth.
For example, if we are trying to determine the tax residency for the tax year 2019, we will take all the sum of the days an individual was physically present in the United States in 2019, one-third of the days in 2018 and one-sixth of the days in 2017. If the total amount equals or exceeds 183 days, then this individual is a US person for FBAR purposes.
It should be pointed out that this is the general rule. There are numerous exceptions to the Substantial Present Test, including the famous “closer connection exception” and certain visa exemptions. Hence, you should retain an international tax attorney to analyze your specific set of facts in order to determine whether you should be considered a US person for FBAR purposes.
FinCEN Form 114 Filers: First-Year Residency Election
The third category of residents of the United States for FBAR purposes includes all individuals who made a first-year election on their US tax returns to be treated as residents pursuant to IRC §7701(b)(4). Generally, we are talking about a situation where a person does not have a green card, does not meet the Substantial Presence Test and comes sometime during a year. In other words, this person is not a US person under any other category, but decides to make an election to be treated as a US tax resident.
In order to make this election, the person must satisfy certain requirements outlined in IRC §7701(b)(4). Failure to meet any of these requirements will result in a person becoming a non-resident alien for the entire year.
FinCEN Form 114 Filers: First- and Last-Year Residency Provisions of IRC §7701(b)(2)
IRC §7701(b)(2) is not technically a fourth category of a resident of the United States. Rather, this section regulates when US residency actually starts or ends once it is acquired or lost under other categories. Nevertheless, it is important to understand and be aware of these provisions.
FinCEN Form 114 Filers: Tax Treaties & FBAR Residency Status
Most tax treaties contain what are known as “tie-breaker provisions” for determining a person’s tax residency. Sometimes, a person can use these provisions to escape the income tax residency rules. The IRS has specifically stated that, as long as one of the residency test of IRC §7701(b) is met, the tax treaty non-residency determination does not affect the residency status of a person for FBAR purposes.
Contact Sherayzen Law Office for the Determination of Whether You and Your Family Should Be Considered FinCEN Form 114 Filers
If you have foreign bank accounts, you should contact Sherayzen Law Office for professional help concerning whether you need to file an FBAR. Sherayzen Law Office is a highly-experienced international tax law firm which has helped hundreds of US taxpayers with their FBAR issues. We can help You!