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Tips on Filing the Foreign Bank Account Report, or FBAR

In the last post, we were discussing the importance of filing the Foreign Bank Account Report, or FBAR, if you hold offshore bank accounts or other specified offshore assets. Many taxpayers make the mistake of reporting offshore income on their tax returns, and then failing to file the FBAR as required.

The Internal Revenue Service offers advice on irs.gov on filing the FBAR. Here is a summary of some of that advice:

Who should file the FBAR? 
American taxpayers, including citizens, residents and entities, with foreign financial accounts totaling more than $10,000 at any point during a given year should file the FBAR. Note that the $10,000 is a total of all funds in offshore accounts, not a limit on each account individually.

Here is one tricky aspect of figuring the value of an offshore account: you need to take the highest balance at any time during the year, but then use the exchange rate as of December 31st of that year.

What assets need to be reported?
Foreign bank and brokerage accounts, as well as pooled investments (not including private-equity and hedge funds), offshore mutual funds, some foreign trusts, foreign life insurance or annuities if they have cash value and overseas individual pension plans, such as a foreign version of an IRA.

Orange County tax attorneys point out that an account with a foreign bank that is at a U.S. branch does not need to be reported on the FBAR, but an account with an American bank that is located outside the U.S. needs to be reported. It is not the bank that matters, it is the location of the account.

What are the penalties for failing to file?
The penalties for willful failure to file are severe, as discussed in the last post. But even a non-willful failure to file an FBAR may trigger a $10,000 penalty per year.

When is the deadline?
The FBAR is not an IRS document, but a Treasury Department form, so the filing rules are different. The FBAR must be received by June 30th, not just postmarked.

Source: Yahoo! Finance "Sacre Bleu! The Foreign-Account Penalty" 4/29/2011

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