With certain limited exceptions, U.S. taxpayers with one or more foreign bank and investment accounts containing at least $10,000 (in cash or assets) in the aggregate during the calendar year must file an FBAR (Report of foreign bank and financial accounts), FINCIN Form 1141. This obligation is separate from your obligation to file income tax return. See Appendix “A” for a detailed explanation regarding FBAR filings.
What is a foreign financial account for FBAR purposes?
If you have an on-line gambling account hosted in a foreign country in which you deposit funds to gamble, is it a foreign bank account? A federal district court said yes, but it was overruled by the Ninth Circuit Court of Appeals in U.S. v Hom (decided in 2016), in which the court held that merely having a foreign account that primarily facilitated online gambling, without additional characterizes of a financial account or bank – such as the transfer of funds from one financial institution to another, or providing interest-bearing accounts or lending services – was not a bank for FBAR purposes. Unfortunately, the Hom case was designated as “unpublished” and cannot be used for legal precedent; although, it appears that FinCEN has backed off challenging on-line gambling accounts for the time-being.
What about a foreign virtual currency account?
The same reasoning under Hom should apply to these accounts. But there is good news and bad news concerning virtual currency accounts: Currently, FinCEN’s position is they are not reportable on an FBAR; the bad news – FinCEN is drafting regulations to make them FBAR reportable. Expect the regulations to be finalized in 2021 or 2022.
If you currently have unreported on-line foreign gambling or virtual currency accounts that lack any traditional banking attributes, you probably do not have a FBAR filing requirement. For virtual currency accounts, this will change once Fin CIN publishes regulations requiring FBAR reporting in the near future.
1 FinCEN means Financial Crimes Enforcement Center and is part of the U.S. Treasury.
Taxpayers with an ownership interest or signature authority over foreign financial accounts (bank and brokerage accounts, corporate, trust and other entity accounts, certain retirement plans and life insurance with a cash value) are required to file an annual Foreign Bank and Financial Account Reports (FBARS) on-line with FinCEN. Starting with the 2016 FBAR, the due date is the due date of the 2016 income tax return, with regard to extensions. Both current and delinquent FBARs must be filed on-line: FBAR On-line.
To determine the value of a foreign account during the year, the highest value of the account during the year is multiplied by the U.S. dollar exchange rate at the end of the year, using the U.S. Treasury Exchange Rates. If the rate is not available, then use any recognized exchange rate service.
The maximum fine for a non-willful failure to timely file an FBAR is $10,000 and there is a six-year statute of limitations for assessment of the penalty (thus, there can be $60,000 in penalties, one for each delinquency). The penalty may be reduced or eliminated upon a showing of “reasonable cause,” which mean, basically, that taxpayers were not negligent in their failure to comply. There is an amnesty program if taxpayers reported their foreign financial account income and gains, but failed to file FBARS.
For willful violations, the penalty can be as high as 50% of the highest amount in the accounts during the past six years or $129,210 (increased for inflation), whichever is greater, and IRS has a string of recent federal court victories upholding the imposition of willfulness penalties. Willfulness includes objectively reckless behavior in additional to intentional conduct. In a recent case, Horowitz, No. 19-1280 (4th Cir. 10/20/20), the court of appeals upheld a willfulness penalty where taxpayers failed to disclose to their accountants the existence of foreign accounts and checked the box “no” on Schedule B, Part III (that asks whether you have foreign accounts).