Expanding internationally can be an incredible opportunity for American entrepreneurs. However, doing business abroad comes with a long list of requirements for U.S. businesses and their leaders. One of these requirements is Foreign Bank Account Reporting (FBAR). If they meet the threshold for filing, American businesses must report all offshore accounts to the U.S. government or face big fines. In an ongoing court case, the Supreme Court will decide just how much noncompliance will cost you.
What is foreign bank account reporting?
Americans doing business abroad may already be aware that you need to file and pay U.S. taxes on your worldwide income. A similar but separate rule requires all U.S. citizens and green card holders to report their foreign financial accounts once they hit the threshold. When that happens, you must file the FBAR, also known as FinCen 114, annually with the Financial Crimes Enforcement Network of the Treasury Department.
For those who know the rules, filing the FBAR is a relatively straightforward process. Unfortunately, this obligation often takes business owners by surprise. Triggering the FBAR requirement is much easier than most entrepreneurs expect. Once you have a combined $10,000 across all foreign accounts, you'll need to file to avoid stiff penalties.
When filing the FBAR, you must report all your foreign accounts. This includes checking, savings, securities, brokerage, deposit, and all other accounts held at a financial institution. You'll also need to report annuities with a cash-out value, mutual funds, and whole-life insurance policies.
The FBAR penalties.
Penalties for failing to file the FBAR are steep--even if you didn't know you needed to file. Each non-willful violation carries a civil penalty of $10,000. However, this amount is adjusted for inflation each year, making the penalty for non-willful noncompliance $14,489 in 2022.
If you've been doing business abroad for a while before finding out about your FBAR requirements, you can be fined for the past six years of violations. That means you could pay over $60,000 in penalties--or perhaps a lot more, depending on an upcoming Supreme Court decision.
What the upcoming court decision will mean for entrepreneurs.
In June 2022, the Supreme Court accepted the case of Bittner v. United States. In this case, the court is expected to put an end to the debate over whether non-willful FBAR violations apply per form or per account.
The difference between these two methods of calculating FBAR penalties is significant. If penalties are applied per form, the total amount maxes out at $10,000 per year (adjusted for inflation). If, on the other hand, entrepreneurs are fined per account, this total jumps to over $50,000 per year for five accounts, $100,000 per year for 10 accounts, and so on.
Recent court cases have left business leaders and tax professionals without clear guidance on how penalties will be applied. In March 2021, the Ninth Circuit decided in United States v. Boyd that non-willful FBAR penalties apply per form. Just a few months later, however, the Fifth Circuit held in United States v. Bittner that a Romanian-born businessman was liable for penalties per account. Having dozens of overseas accounts, this meant he would owe $2.72 million in FBAR penalties rather than $50,000.
For entrepreneurs, the outcome of the Bittner case will provide much-needed clarity on the true cost of non-willful non-compliance. At the same time, well-defined rules will make it easier for tax professionals to advise business leaders on how to become and stay compliant with FBAR regulations.
Another key takeaway is for companies to enlist the help of an experienced international tax professional when operating or investing overseas. Beyond helping you meet your annual FBAR and tax filing requirements, an accountant can help you stay ahead of changing regulations. Often, simply knowing your obligations is half the battle. Once you do, you can avoid excessive penalties easily by filing the required forms accurately and on time.