Foreign Bank Account Reporting: How to Avoid a $10,000 Penalty

By Stanley Rose May 17, 2015

Several articles in our newsletters over the last few years have addressed the need to file forms that report the existence of foreign financial holdings. With the deadline for one of the most common filings approaching on June 30, and at the risk of sounding like a broken record (for those of you who actually remember records!), this article is intended to serve as a reminder and perhaps explain a couple things people may not know about these filings. The reason we repeat this message is that the penalties for not filing these forms can be very large, and far out of proportion to the oversight.

What it is

U.S. Treasury Department Form FinCEN 114 must be filed electronically each June 30. It is done so using this website. The form lists, among other things, the filer’s name, account holder’s name (as explained below, the filer and account holder may be different parties), account number, highest balance reached during the year, and the name and address of the financial institution. What it does not include is a tax payment due. No tax is assessed with this form; it solely collects information.

Who must file – it may not be who you think

The forms must be filed by any “person” who had “financial interest” in or “signature authority” over a “foreign financial account” or accounts that exceeded $10,000 in U.S. dollars at any point in the previous year. These terms may have different meanings from what one would expect. For instance:

1. “Person” means an individual resident or citizen of the U.S., and nearly any type of domestic entity, including corporations, partnerships and trusts.
2. “Financial interest” includes ownership of record, even if maintained for another person. You also must file if you own more than 50% of an entity (directly or indirectly, and measured in a number of ways) that has a financial interest in a foreign account.
3. “Signature authority” describes a person’s ability to control the movement of assets held in an account, even if the account belongs to someone else. A company CFO or other executive often has this authority through signing checks or wiring funds, and must personally file Form FinCEN 114 to report the company’s foreign accounts.
4. “Foreign financial account” must be broken down further:
   1. “Financial account” is not fully defined, but can include (although is not limited to) conventional bank accounts, brokerage accounts, CDs, insurance policies with a cash value, and mutual funds.
   2. “Foreign” refers to an account held outside of U.S. borders. An account held in a foreign branch of a U.S. bank is a foreign financial account, but a foreign bank’s U.S. branch account is not.

Observation: It is both appropriate and common for multiple FinCEN 114 forms to be filed to report the same account. For example, a $25,000 foreign account must be reported by a partnership that owns the account, a corporation owning more than half of that partnership, the individual who owns that corporation, and two executives who work for the partnership that have the ability to write checks on that account. In this example, five forms must be filed to report one account. (In some cases a consolidated form may be filed on behalf of a lower-tier entity, but this holds true only under certain circumstances and does not remove the filing requirements for individuals.)

What’s the big deal?

The penalties for not filing or improperly filing Form FinCEN 114 begin at $10,000, except in cases where there is “reasonable cause” for the failure. If willful, the penalty can reach the greater of $100,000 or 50% of the account balance. Because this is an annual penalty, it is easily possible for the full balance in the account to be confiscated just to fund two years of penalties, and if the failure continues for years, the penalties can reach multiples of the account holdings. These represent only the civil penalties; criminal penalties may exist as well. There are always exceptions, but the government generally does not apply penalties for true oversights. But in cases where it appears the failure was willful, it often does not hesitate to rain a storm of financial pain on the violator’s head. This, dear reader, is not a filing to take lightly.

For people who realize too late that they have overlooked proper filing of these forms, there are a number of ways to “come clean.” In a previous article here, we discussed some of those options, but these programs change with some frequency, and we highly advise seeking help from an experienced tax professional before considering which of these alternatives applies to, and is best for, you.

Conclusion

Any reader who may hold or have signature authority over a foreign account is highly encouraged to verify whether or not Form FinCEN 114 must be filed. The filing is relatively easy and involves no tax, but the penalties for non-filing are too high to risk.  The material covered in this article is presented on a very basic level, and it is not exhaustive by any means. If you have any questions regarding these matters, do not hesitate to contact me or Stuart Lyons, our international tax practice leader.