There’s an old saying that if you don’t know your history, then you are destined to repeat its mistakes. While the tale is a reference to world history, it could refer to FBAR reporting, too.
This is because, in order to understand why you need to take the right action today, it helps to understand the relevant history behind it.
First, a little background information. The Foreign Bank Account Report (commonly referred to as the FBAR), is a filing requirement for Americans living abroad. It states that people who have more than $10,000 in total in a foreign bank or other financial accounts during the calendar year will have to share information about their foreign financial accounts with the federal government using FinCEN Form 114. For the record, many Americans living in another country fall under this requirement.
The purpose of the FBAR is to detect hidden money and prevent people from opening foreign bank accounts to avoid paying taxes rightfully owed to the United States. Unlike other tax forms, the FBAR is filed to the office of Financial Crimes Enforcement Network (FinCEN), a bureau of the Department of the Treasury that is separate from the Internal Revenue Service (IRS).
However, FBAR’s roots go even deeper. While filing the form is often a routine action for many living abroad, the U.S. government takes the FBAR very seriously. It helps determine which U.S. citizens have a financial interest in or authority over foreign financial accounts. This is a direct result of the Bank Secrecy Act of 1970 (BSA), officially known as the Currency and Foreign Transactions Reporting Act. The BSA is a complex law designed to detect and prevent money laundering through financial institutions in other countries. It engages American banks in the process to detect possible crimes through the submission of five different types of reports, all of which serve a different, specific purpose:
- Currency transaction reports are filed for all transactions exceeding $10,000 in one business day, whether in one lump sum or several different exchanges
- Suspicious activity reports are completed when bank employees observe cash transactions where the customer is avoiding federal requirements, appears to be evading federal criminal laws, or otherwise take suspicious actions
- A MIL is filed when someone makes a cash purchase investment into a non-cash banking vehicle, like money orders or cashier’s checks, in the amount of $3,000-$10,000
- Similarly, a Currency and Monetary Instrument Report (CMIR) is necessary when these non-monetary vehicles in the amount of $10,000 or more are transported, mailed, or shipped to another person
- Finally, you guessed it, the FBAR
Combined, these reports give the FinCEN a well-rounded picture of financial transactions that involve foreign money or a foreign banking system. For law-abiding Americans living abroad, they can be annoying, but ignorance is no excuse for American ex-pats not to file an FBAR, as well as a U.S. tax return. Neglecting to do so has severe consequences, including monetary and/or criminal penalties.
