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FBAR Financial Interest Definition | FBAR International Tax Lawyer & Attorney | FinCEN Form 114

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In this article, I discuss one of the most important aspects of FBAR compliance – the FBAR financial interest definition.

FBAR Financial Interest: Legal Relevance and Context

FBAR is the acronym for the Report of Foreign Bank and Financial Accounts, FinCEN Form 114. A US person who has a financial interest in foreign bank and financial accounts must file FBARs to report these accounts as long as their aggregate value exceeds the FBAR filing threshold. The key issue here is the definition of “financial interest” for FBAR purposes.

FBAR Financial Interest: Classification of Financial Interest

As I just stated, the FBAR financial interest definition describes a situation when a US person has a “financial interest” in a foreign account. It turns out that there are six possible situations when a US person may have a financial interest in a foreign account.

These situations can be divided into three categories: direct ownership, indirect ownership and constructive ownership. Let’s explore them in more detail.

FBAR Financial Interest: Direct Ownership

A US person has a financial interest in a foreign account if he is the owner of record or holder of legal title for this account. It does not matter whether he maintains the account for his own benefit or for the benefit of another person (US or foreign). As long as he is the owner of the account, he has a financial interest in the account and must file an FBAR to report it if the account’s highest value (together with all other foreign accounts of this person) exceeds $10,000.

FBAR Financial Interest: Indirect Ownership

There are four different scenarios which may result in having a reportable indirect FBAR financial interest in a foreign account:

1. Indirect Ownership Through a Corporation

A US person has a financial interest in a foreign account if the owner of record of holder of legal title is a corporation in which a US person owns directly or indirectly: (i) more than 50 percent of the total value of shares of stock; or (ii) more than 50 percent of the voting power of all shares of stock.

This means that, if a US corporation owns a foreign company which has a foreign account, then this US corporation has a financial interest in this account through its direct ownership of the foreign company. In other words, the US corporation will need to file an FBAR for the foreign company’s foreign bank and financial accounts.

One of the most frequent sources of FBAR noncompliance, however, is with respect to indirect ownership of the foreign account by the owners of a US corporation. For example, if a Nevada corporation owns 100% of a French corporation and a US owner owns 51% of the US corporation, then, the US owner must disclose on his FBAR his financial interest in the French corporation’s foreign accounts. This financial interest is acquired through indirect 51% ownership of the French corporation.

2. Indirect Ownership Through a Partnership

This scenario is very similar to that of corporations. A US person has a financial interest in a foreign account if the owner of record or holder of legal title is a partnership in which the US person owns directly or indirectly: (i) an interest in more than 50 percent of the partnership’s profits (distributive share of partnership income taking into account any special allocation agreement); or (ii) an interest in more than 50 percent of the partnership capital.

3. Indirect Ownership Through a Trust

This is a more complex category which includes two scenarios. First, a US person has a financial interest in a foreign account if the owner of record or holder of legal title is a trust and this US person is the trust grantor who has an ownership interest in the trust under the 26 U.S.C. §§ 671-679.

Second, a US person has a financial interest in a foreign account if the owner of record or holder of legal title is a trust in which the US person has a greater than fifty percent (50%) beneficial interest in the assets or income of the trust for the calendar year. This second scenario is a true FBAR trap for US taxpayers, because while grantors may anticipate their FBAR requirements, beneficiaries are usually completely oblivious to this requirement.

This category of FBAR financial interest definition is even more complicated by the fact that it requires a very nuanced understanding of US property law and FBAR regulations. For example, how many taxpayers can answer this question: if a US person has a remainder interest in a trust that has a foreign financial account, should he disclose this account on his FBAR?

4. Indirect Ownership Through Any Other Entity

This a “catch-all” category of indirect FBAR financial interest definition. If a situation does not fall within any of the aforementioned categories, a US person still has a financial interest in a foreign account if the owner of record or holder of legal title is any other entity in which the US person owns directly or indirectly more than 50% of the voting power, more than 50% of the total value of equity interest or assets, or more than 50% of interest in profits.

FBAR Financial Interest: Constructive Ownership

This is a very dangerous category of FBAR financial interest definition, because, in the event of an unfavorable determination by the IRS, it may have highly unfavorable consequences, including the imposition of FBAR willful penalties and even FBAR criminal penalties. A US person has a financial interest in a foreign account if the owner of record or holder of legal title is a person who acts on behalf of the US person with respect to the account. Various classes of persons fall under this description: agents, nominees and even attorneys.

This category of FBAR financial interest definition targets situations where a US person is trying to hold his money under the name of a third party. It is not easy, however, to determine whether the foreign person is holding this money on behalf of the US person.

The key consideration here is the degree of control that the US person exercises over the account. If the agent can only access the account in accordance with the instructions from the US person, if there is an understanding that the agent holds the account on behalf of the US person and if the agent does not independently distribute funds for his own needs, then the IRS is likely to find that the US person has a financial interest in the account for FBAR purposes.

On the other hand, if the account owner uses the funds for his own purposes and makes gifts to third parties, the situation becomes increasingly unclear. In this case, one has to retain an international tax attorney to analyze all facts and circumstances, including the origin of funds.

Contact Sherayzen Law Office for FBAR Help, Including the Determination of FBAR Financial Interest in a Foreign Account

FBAR is a very dangerous form. FBAR noncompliance penalties are truly draconian. They range from FBAR criminal penalties (of up to ten years in prison) to civil FBAR willful penalties (with 50% of the account or $100,000 (adjusted for inflation) whichever is higher) and even civil FBAR non-willful penalties of up to $10,000 (adjusted for inflation) per account per year. FBAR’s unusual Statute of Limitation of six years also means that the IRS has an unusually long period of time to assess these penalties.

This is why, if you have foreign bank and financial accounts, contact Sherayzen Law Office for professional help. We are a highly-experienced international tax law firm that specialized in US international tax compliance and offshore voluntary disclosures (including for prior FBAR noncompliance). We have helped hundreds of US taxpayers around the world, and We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

2018 FinCEN Form 114 Deadline | FBAR International Tax Lawyer & Attorney

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The 2018 FinCEN Form 114 deadline is approaching fast. It is definitely one of the most important deadlines that US taxpayers face in 2019. It is also one of the most confusing ones, because this form is not filed with a federal income tax return. Moreover, some taxpayers mistakenly treat 2018 FinCEN Form 114 as something separate from the 2018 FBAR. In order to clarify these issues, Sherayzen Law Office is publishing this notice on the 2018 FinCEN Form 114 deadline to US taxpayers.

2018 FinCEN Form 114 Deadline: Relationship Between FBAR and FinCEN Form 114

FBAR is an acronym for FinCEN Form 114, the Report of Foreign Bank and Financial Accounts. In other words, these are two names of the same form. Also, it is useful to know that, prior to mandatory e-filing, the official name of FBAR was TD F 90-22.1 and it was filed on paper. The name of the form changed once the e-filing form was created.

2018 FinCEN Form 114 Deadline: Pre-2016 Deadline

For the years preceding 2016, the US government chose a very strange deadline for FBARs – June 30 of each year. For example, the 2012 FBAR was due on June 30, 2013. No filing extensions were allowed.

The last FinCEN Form 114 that followed the June 30 deadline was the 2015 FinCEN Form 114; its due date was June 30, 2016. This fact is still relevant for offshore voluntary disclosures and FinCEN Form 114 audits due to the six-year FBAR statute of limitations. The June 30 deadline will continue to be relevant as late as June 30, 2022.

2018 FinCEN Form 114 Deadline: Changes Starting 2016 FinCEN Form 114

In order to resolve the problem of confusing deadlines, the US Congress changed the FinCEN Form 114 deadline as part of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (the “Act”). Under Section 2006(b)(11) of the Act, starting 2016 FinCEN Form 114, US Persons must e-file FBARs by the due date of that year’s tax return (i.e. usually April 15), not June 30.

Furthermore, during the transition period (which continues to this date), the IRS granted to US taxpayers an automatic extension of the FinCEN Form 114 filing deadline to October 15. Taxpayers do not need to make any specific requests in order for an extension to be granted.

In other words, starting 2016 FinCEN Form 114, the Act adjusted the FinCEN Form 114 due date to coincide with the federal income tax filing deadlines. This is the case even if federal law requires a different filing date. For example, in situations where the tax return due date falls on a Saturday, Sunday, or legal holiday, the IRS must delay the due date until the next business day; the FBAR deadline will follow suit and also shift to the next business day.

2018 FinCEN Form 114 Deadline

Based on the current law, the 2018 FinCEN Form 114 deadline will be April 15, 2019. In other words, your 2018 FinCEN Form 114 has to be e-filed by and including that date. Automatic extension to October 15, 2019, is available.

2018 FinCEN Form 114 Deadline: Who Must File by April 15, 2019

A US Person must file his 2018 FinCEN Form 114 by April 15, 2019, as long as his foreign bank and financial accounts meet the FinCEN Form 114 filing requirements.

“US Person” has special significance in the context of FinCEN Form 114. This term is very similar to the concept of “US tax resident”, but there are some differences between these terms. In general, a US Person includes a US citizen, a US permanent resident and any person who satisfies the Substantial Presence Test. The term also covers any business entity, trust and estate formed under the laws of the United States.

Moreover, “US Person” also applies to certain non-resident aliens who make first-year election under IRC §7701(b)(4). This term, however, does not apply to persons who make the first-year election pursuant to IRC §6013(g) or (h) election. See this article for a more detailed discussion of individual FinCEN Form 114 filers.

2018 FinCEN Form 114 Deadline: the Trigger for the FinCEN Form 114 Requirement

The FinCEN Form 114 requirement is triggered whenever a US person has a financial interest in or signatory authority or any other authority over foreign bank and financial accounts the highest aggregate value of which exceed $10,000. The term “accounts” is defined very broadly to include pretty much any custodial relationship. For example, this terms includes: foreign bank accounts, foreign fixed-deposit accounts, foreign investment accounts, foreign mutual funds, foreign precious metals accounts, foreign life insurance policies, foreign retirement accounts and so on and so forth.

A PPF account in India is a reportable foreign account for FinCEN Form 114. The French Assurance Vie accounts, Malaysian health insurance investment accounts, Australian Superannuation Fund accounts, Colombian building contract accounts, Argentinian “participation” accounts, German “building” accounts, Spanish mutual fund accounts, Swiss financial products are all reportable bank and financial accounts for FinCEN Form 114 purposes; so are Goldmoney and BullionVault accounts.

Contact Sherayzen Law Office for Professional Help With Your 2018 FinCEN Form 114 Deadline

Sherayzen Law Office is an international tax law firm that specializes in FinCEN Form 114 compliance. We have filed thousands of FBARs for our clients as part of their annual tax compliance as well as offshore voluntary disclosures. We can help You!

Contact Us Today to Schedule Your Confidential Initial Consultation!