Individuals who qualify as U.S. persons may be required to file FBARs, also known as Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts, with the U.S. Department of the Treasury (see “Is your client a U.S. person?”).
Generally, U.S. persons with financial interests or signing authority over one or more foreign financial accounts (FFAs) with an aggregate value over US$10,000 during a calendar year must electronically file FBARs. The form is due on or before June 30 each year for the previous calendar year.
So, if your U.S.-citizen client holds a Canadian-located bank account with US$10,500 from which he can withdraw funds by signing cheques, he must file an FBAR.
And while that’s a common FBAR filing situation, others may not be so obvious.
4 surprising situations
1. Beneficial ownership of FFAs
U.S. persons who are beneficial owners of FFAs, rather than account holders themselves, may be required to file FBARs. Beneficial owners are considered to have financial interests in FFAs, even though they can’t directly authorize FFIs themselves.
Pursuant to Title 31 of the U.S. Code of Federal Regulations (CFR) Section 1010.350 (e)(2)(i), “A United States person has a financial interest in each bank, securities or other financial account in a foreign country for which the owner of record or holder of legal title is a person acting as an agent, nominee, attorney or in some other capacity on behalf of the United States person with respect to the account.”
Some U.S. clients may not be aware of the rule’s broad applications. For instance, if your U.S. client asks his Canadian-resident friend to hold more than US$10,000 in that friend’s FFA, the U.S. client must file an FBAR even though the friend may not legally be the client’s agent. The friend, however, is acting “in some other capacity” on behalf of the U.S. person.
2. Personal filing obligations of majority business owners
U.S.-created corporations, partnerships and LLCs are all U.S. persons with FBAR filing obligations. However, U.S. persons with majority ownership interests in such entities have to file personal FBARs reporting the entities’ FFAs as well, since the ownership interests of U.S. persons are deemed to be financial interests. In fact, a U.S. person can own a majority financial interest in a business entity if he directly or indirectly owns:
- more than 50% of the voting power or total value of a corporation’s shares;
- more than a 50% interest in the profits or capital of a partnership; or
- more than 50% of the voting power, total value of the equity interest or assets, or interest in profits of any other business entity other than some trusts.
U.S. persons with such financial interests are often surprised by what they are reporting in these circumstances; the obligation is to report the corporation, partnership or other business entity’s FFA on the U.S. person’s own FBAR. Whether the U.S.-created entity has to file an FBAR itself is irrelevant; the majority owner must still report the FFA.
3. Minor children
U.S. minors who have signing authority or financial interests in FFAs that exceed US$10,000 must also file FBARs.
Recent instructions for FinCEN Form 114 state, “Generally, a child is responsible for filing his or her own FBAR report. If a child cannot file his or her own FBAR for any reason, such as age, the child’s parent, guardian or other legally responsible person must file it for the child.”
Your adult clients must electronically sign the FBAR on behalf of their minor children in item 45 of Form 114, Filer Title, by entering “Parent/Guardian filing for child.”
4. PoAs for foreign property
U.S. persons who hold PoAs over Canadian property also have to file FBARs. This rule is based on the fact that holding a PoA over an FFA provides the agent with signing authority over the FFA.
For example, if a Canadian citizen who is a U.S. resident has a PoA for his aging parents’ joint bank account in Canada, he must file an FBAR reporting that account regardless of whether he has actually exercised authority over that account. Possessing signing authority via the PoA is enough to require an FBAR (see “The pitfalls of non-resident PoAs” AER October 2015).
Consequences for failing to file
U.S. persons who fail to file FBARs face civil penalties that range in amount, depending on whether the violations were non-willful or willful.
Such penalties can cost clients thousands of dollars. Willful violations may also result in criminal penalties. So, it’s imperative to help U.S. persons remain compliant with unexpected FBAR obligations.