In addition to the tax reporting and tax payment obligations, American citizens and permanent residents have an additional reporting obligation – the obligation to submit an FBAR report. There is a great deal of confusion regarding this obligation – is it an independent obligation? Are those who submitted the tax return report exempt from the duty of filing the FBAR? Who must submit it and how should it be filled out? The answers to these questions and many more will be discussed in the article before you.
The FATCA act
The Foreign Accounts Tax Compliance Act (or FATCA in short) is a U.S. federal law that seeks to increase enforcement of reporting and tax payments among American citizens.
The law applies to U.S. citizens, permanent residents, and U.S. corporations (of various types), and requires those to submit (in addition to the annual tax report), an annual report on foreign financial accounts with an amount greater than the reporting threshold. As will be explained in the following segments, in addition to the obligation imposed on American citizens, the law also requires foreign financial institutions to report on these accounts. The corresponding report, in the legislature’s view, will ensure increased enforcement of annual tax reports.
This report is not submitted to the U.S. Tax Authority, as the annual tax report is, but is submitted to the Treasury Department, the Department of Financial Crimes. The report is submitted only electronically.
What is the connection between the FBAR and other tax reporting obligations?
As part of the taxpayer’s annual tax liability, a U.S. citizen must report his global income, as well as report his or her foreign financial assets through Form 8938. However, filing the annual income tax report, including the submission of Form 8938, does not exempt the taxpayer from submitting an FBAR report. The obligation to report through the FBAR report is a separate and independent obligation towards the U.S. Treasury Department. Furthermore, filing an FBAR report does not in itself establish tax liability.
Who must submit an FBAR report?
The law sets out three cumulative conditions that establish the obligation to report:
- The reporter is a U.S citizen, a permanent resident status, or an American corporation.
- To a reporter owns, is a partner or holds signature permission in financial accounts outside the United States.
- The cumulative amount of the account exceeded $10,000 at some point during the tax year.
What are the accounts requiring FBAR reporting?
The reporter must report all foreign financial accounts in which he is involved. The definition of “financial accounts” is very broad, but for your convenience here are several financial accounts that are commonly used:
- Current accounts
- Deposits and savings accounts
- Pension funds
- Securities portfolios
- Executive Insurance
- Provident funds
- Training funds
- Life insurance with a savings component.
As mentioned above, you should only report these accounts if their cumulative amount has exceeded $ 10,000 at any point during the tax year. This means that the reporter must examine each of the accounts, sum the amounts deposited in them and convert them to dollars (according to the exchange rate on the last day of the tax year). This task is Sisyphean and may be complex and so we will recommend using professional services.
What does the FBAR reporting form include?
The reporting form includes four parts:
Part 1 – Personal Details
In this section, the reporter will provide personal identification information such as full name, EIN /SSN number, date of birth, full address, telephone, the identity of the reporter (individual/ company/partnership), number of accounts in which he has a direct interest and number of accounts in which he has an indirect interest.
Part 2 – Financial accounts owned by the reporter
In this section, the details of financial accounts that are fully owned by the reporter (without partners) will be reported. The account information, the type of account, the amount of funds, the full details of the financial institution in which the accounts are held will be provided.
Part 3- financial accounts in which the reporter is a partner
A designated segment intended for accounts that are in partnership. All account information as described in Section 2 will be provided, as well as the full details of the partner.
Part 4 – Financial accounts in which the reporter is an authorized signatory
As with the other parts, the reporter must provide full details about the account. In addition, the reporter must provide full details about the owner of the account.
When and how do I submit the FBAR report?
The filing date is April 15 of the following tax year. The report is available only electronically on the website of the Enforcement Division of the U.S. Treasury Department, the FINCEN.
Enforcement of the FBAR reporting obligation – why file the report?
In addition to the reporting obligation of citizens of the state, the state requires financial institutions around the world to hand over information about accounts of American citizens. Thus, the law requires foreign financial institutions to identify accounts whose holders are U.S. citizens and report them to the U.S. Internal Revenue Service.
In order to encourage compliance among financial institutions, the law stipulates that an institution that does not comply with the requirements of the law will risk withholding tax at a rate of 30% of any income derived from the United States and transferred to the institution. It is a heavy sanction that has resulted in relatively full compliance with the duty.
To further establish the fulfillment of this duty, the US administration has signed Treaties that regulate the Exchange of Financial Information with many countries. According to the conventions, the states mutually undertake to transfer information about financial accounts managed in their fields by citizens of the state that is a partner in the covenant. In this way, information is cross-referenced by the U.S. Tax Authority, which ensures increased enforcement of tax reporting obligations.
The State of Israel is a signatory to a similar treaty. Therefore, Israeli banks track indications of accounts managed by American citizens or in partnership with American citizens. Given this type of indication, the customer will be asked to sign the W-9 form, in which he declares that he reports his income to the American Tax Authority.
Refusing to sign the form may result in an account freeze or withholding tax at a rate of 30% of income originating in the United States.
In light of the exchange of financial information between the countries, our recommendation is to submit an FBAR report and a legal annual tax report. If you want to examine the range of options available to you and carry out tax planning that will ensure minimal exposure to the tax burden – MasAmerica’s team of experts will be happy to assist you.
This should not be seen as legal advice. It is recommended to consult with the team of MasAmerica before any action. The service is provided by a professional team, who speak English and Hebrew fluently, and includes lawyers and accountants with American licensees.