In addition to tax reporting and payment obligations, U.S. citizens and permanent residents have an additional reporting requirement: the FBAR (Foreign Bank Account Report). There is significant confusion regarding this requirement. Is it an independent obligation? Are those who file tax returns exempt from submitting an FBAR? Who must submit it, and how should it be completed? These questions, among others, will be addressed in this article.
The FATCA Act:
The Foreign Account Tax Compliance Act (FATCA) is a U.S. federal law designed to enhance the enforcement of tax reporting and payments among American citizens. The law applies to U.S. citizens, permanent residents, and U.S. corporations of various types. It requires them to submit an annual report on foreign financial accounts exceeding a specified threshold, in addition to their annual tax return.
FATCA also requires foreign financial institutions to disclose these accounts. This dual-reporting mechanism enhances tax enforcement. Unlike the annual tax return, which is submitted to the U.S. Internal Revenue Service (IRS), the FBAR is filed with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) and must be submitted electronically.
Connection Between the FBAR and Other Tax Reporting Obligations:
As part of their annual tax liability, U.S. taxpayers must report their global income and foreign financial assets using Form 8938. However, filing an annual tax return—including Form 8938—does not exempt taxpayers from submitting an FBAR. The FBAR is an independent reporting obligation to the U.S. Treasury Department. Furthermore, submitting an FBAR does not, in itself, create a tax liability.
Who Must Submit an FBAR?
The law establishes three cumulative conditions for FBAR reporting:
- The filer is a U.S. citizen, a permanent resident, or an American corporation.
- The filer owns, is a partner in, or has signature authority over financial accounts located outside the United States.
- The cumulative balance of these accounts exceeded $10,000 at any time during the tax year.
Accounts Requiring FBAR Reporting:
FBAR reporting applies to all foreign financial accounts in which the filer has involvement. The definition of “financial accounts” is broad, but commonly reported accounts include:
- Checking accounts
- Savings and deposit accounts
- Pension funds
- Securities portfolios
- Executive insurance policies
- Provident funds
- Training funds
- Life insurance policies with a savings component
As noted, reporting is required only if the cumulative balance of these accounts exceeded $10,000 at any point during the tax year. To determine compliance, filers must review each account, total their balances, and convert them to U.S. dollars using the exchange rate on the last day of the tax year. Given the complexity of this process, professional assistance is recommended.
What Does the FBAR Form Include?
The FBAR form consists of four sections:
- Part 1 – Personal Details: This section requires the filer’s identifying information, including:
- Full name
- EIN/SSN number
- Date of birth
- Full address
- Telephone number
- Identity classification (individual/company/partnership)
- Number of accounts in which they have direct and indirect interests
- Part 2 – Financial Accounts Owned by the Filer: This section details financial accounts fully owned by the filer. Required information includes:
- Account details
- Account type
- Balance
- Financial institution details
- Part 3 – Financial Accounts in Which the Filer Is a Partner: For accounts held in partnership, this section includes all details from Part 2, along with information about the partner(s).
- Part 4 – Financial Accounts Where the Filer Has Signature Authority: For accounts in which the filer has signature authority but no ownership interest, this section requires full account details as well as information about the account owner.
When and How to Submit the FBAR?
The FBAR is due April 15 of the following tax year. It can only be filed electronically via the U.S. Treasury Department’s FinCEN website.
Enforcement of the FBAR Reporting Obligation – Why File?
In addition to individual reporting requirements, FATCA mandates that foreign financial institutions disclose accounts held by U.S. citizens. To enforce compliance, the law states that institutions failing to report will be subject to a 30% withholding tax on any U.S.-sourced income transferred to them. This severe penalty has led to widespread compliance.
To strengthen enforcement, the U.S. government has signed financial information exchange treaties with many countries. Under these agreements, governments share data on accounts held by foreign nationals. The IRS cross-references this data to ensure tax compliance. Israel is a signatory to such a treaty. As a result, Israeli banks monitor accounts with U.S. citizen involvement. If an account is flagged, the bank may require the customer to sign Form W-9, declaring that they report their income to the IRS.
Refusing to sign Form W-9 may lead to an account freeze or a 30% withholding tax on U.S.-sourced income.
Given the exchange of financial data between countries, we strongly recommend submitting an FBAR alongside a properly filed tax return.
Contact Us:
This document does not constitute legal advice. We recommend consulting with MasAmerica’s US tax experts in Israel before taking any action. Our professional team, fluent in English and Hebrew, includes licensed U.S. attorneys and accountants.
