So, what is an FBAR and why would a Digital Nomad care about its requirements?
FBAR stands for Foreign Bank Account Report. As an American living abroad, you more than likely will have a financial account at a foreign bank or financial institution.
Unfortunately, having a bank account in a foreign country can trigger a requirement to inform the US DOJ of this foreign account activity.
Sounds precarious, right!? It’s not for most of us. We’re simply letting the government know we have an account in a foreign country. The DOJ uses this as a means to find terrorist activity within our borders.
You may be required to file form FinCEN 114. Your tax responsibilities don’t end when you cross the US border.
Let’s take a look at the basics of what an FBAR entails, including:
- What an FBAR is
- Who files an FBAR
- FBAR deadlines
- Filing instructions
- Penalties for not filing
FBAR Defined
FBAR stands for Foreign Bank Account Report. Pretty simple. If your foreign accounts held a combined amount of $10,000 or more at any point during the calendar year, you are required to file FinCEN Form 114 reporting the financial institution, account number, and highest balance during the calendar year.
There are heavy penalties for those who fail to file, so it’s a good idea to stay current with your filings.
As a Digital Nomad, you will simply report the balance in your foreign accounts, but be aware of these additional accounts you may also have to report:
- Assets being held in a foreign branch of a US financial institution.
- Land being held in a foreign corporation or trust.
- Any financial account you have a financial interest in.
- Foreign retirement (not government-held) accounts.
- Investments in foreign companies held by foreign institutions.
- Any foreign bank account in which you have signature authority.
Who Is Required to File an FBAR?
An FBAR must be filed by any US citizen, green card holder, resident alien, or dual citizen who has a financial account(s) with a combined $10,000 balance at any point during the year. Whether you domicile in the U.S. or a foreign country, this is the case.
Having a Financial Interest is not the same as having a Signature Authority.
A Financial Interest leans more towards ownership. You have a financial interest in your checking and savings accounts.
Signature Authority doesn’t automatically come with a Financial Interest. As a CPA firm that cuts client checks, we may have Signature Authority giving us the right to sign checks. Sometimes a business gives an employee Signature Authority as a convenience. As a signatory on an employer’s foreign bank account, you have signature authority and should report the account on your FBAR.
A foreign financial account is an account located outside of the 50 states, Washington DC, and US possessions (like Puerto Rico).
Something to watch out for is foreign retirement accounts. Some countries (like Canada or Australia) set up some retirement accounts like regular portfolio accounts. These types of accounts need to be reported via an FBAR filing.
FBAR deadlines 2024
The 2024 FBAR filing deadline is the same as your income tax return due date, usually April 15. You can ask for an automatic 6-month extension to October 15th.
How to file an FBAR
If you are truly a Digital Nomad then you should have a professional file your income tax returns and include the FBAR filing.
If you prefer to file on your own, you should e-file from the FinCEN website.
The first time you file, I’d suggest downloading the .pdf to fill in and file. While doing a little more work initially, you will have a copy of the actual form, filled in with your information. Since you will need to file this report every year you have more than a combined $10,0000, it’s nice to have a copy of a previously filed report to look back on.
Penalties for not filing an FBAR
This can get ugly, fast.
Since the necessity of FBAR filing is based on finding illegal activities, like money laundering and terrorist incels, the penalties can get pretty steep.
Criminal penalties can be up to $250,000 per incident.
The IRS has the ability to fine up to 50% of the asset balance during the year. They technically have the right to a 100% penalty, but I’ve never seen one outside of criminal activity.
Now that you have been properly warned, let’s see what a typical penalty may be.
If you simply forgot to file (non-willful) the maximum penalty the IRS can assess is $10,000. This $10,000 penalty is based on the form not being filed. In the recent past, the IRS was assessing a $10,000 penalty on each ACCOUNT not reported.
As you can see, even simply forgetting to file can be expensive. As a Digital Nomad, filing your annual FBAR should be part of your annual tax filing checklist.
What if I’ve never filed an FBAR but I should have?
I thought about putting this section before talking about non-filing penalties. As you see above, the penalties can be horrific.
So, what happens if you’ve NEVER filed and you should have?
Not much, as long as the IRS hasn’t reached out to you requesting your FBARs. You’ll have to file electronically on the FinCEN website. Follow the instructions to submit a late report.
You will need to explain why you are late. Since this is a somewhat complicated, and less known requirement, not knowing can be a reasonable cause, although I’d want a better reason than ignorance.
Reasons that have proven traction are “Circumstances beyond the taxpayer’s control”, or “Information unavailable at the time needed”
If the IRS HAS reached out to you regarding FBARs, you can then utilize the IRS Streamlined
My biggest takeaway from the Streamlined Procedures is the fact that you must certify that your non-filing was not willful. Willfully refusing to file may land you in a criminal complaint. The IRS isn’t very forgiving when it comes to criminal activity.
What else should I know about reporting foreign bank and financial accounts?
Form 8938
Form 8938 is the FBAR report on steroids. The thresholds are higher and different depending on the type of taxpayer you are (married, unmarried, joint filer, separate filer)
If you had foreign assets that were valued at over $50,000 you may need to look into filing form 8938. If you have to file form 8938, this does not relieve you of your responsibility to file an FBAR.
Conclusion
Hey Digital Nomads, learn the FBAR requirements.
Once an FBAR filer…ok. So you might not have to file an FBAR every year, especially if your cash position fluctuates over the $10,000 threshold.
However, the chances are good you will be filing every year.
For this reason, I suggest filling in the .pdf form. This way you’ll have a reference for subsequent years.
If you are truly a Digital Nomad, you will most likely need to file an FBAR, so knowing the requirements can save you a lot of money.
The penalties for non-compliance can be huge. Up to 100% of the balance of the year in question. These harsh penalties are generally reserved for criminal cases, but you can be fined up to $10,000 for filing late.