Federal Highway Bill Alleviates Compliance Burden for Taxpayers with Foreign Bank Accounts
A recent change in the tax law eases the compliance burden on U.S. taxpayers with foreign bank accounts. The Federal Highway Bill (“Highway Bill”), which was signed into law on July 31, 2015, changes the due date of the Report of Foreign Bank and Financial Accounts (FBAR) to coincide with the due date for individual returns. The FBAR, which was previously filed on Form TD F 90-22.1 and due no later than June 30, is currently filed on FinCEN Form 114. The new April 15 due date also coincides with the due date of Form 8938, Statement of Specified Foreign Financial Assets, which many taxpayers often confuse with the FBAR filing requirement.
U.S. citizens, U.S. residents, and entities (corporations, limited liability companies, partnerships, trusts and estates) formed under U.S. law are required to disclose their holdings in foreign financial accounts on the FBAR if the value of these accounts exceeds $10,000 at any time during the previous year. Foreign financial accounts include bank accounts, mutual funds, and insurance policies with a cash value maintained by a foreign bank or other financial institution. Penalties for failure to file an FBAR can be steep. An unintentional violation can subject a taxpayer to a maximum $10,000 penalty, while a willful violation can subject a taxpayer to a penalty equal to the greater of $100,000 or 50% of the value of the account. The FBAR was originally intended to be part of an anti-money laundering regime. However, many taxpayer advocacy groups have complained that it is used more as a tax enforcement mechanism with penalties that are grossly disproportionate.
Congress believes that taxpayers will be less likely to forget their reporting obligation if they only have one filing date. Not only does the Highway Bill change the FBAR filing deadline from June 30 to April 15, but it permits taxpayers to request a six-month FBAR filing extension to match the extension available for individual returns. This change is effective for tax years beginning after December 31, 2015. Therefore, the 2016 FBAR, which reports foreign accounts held in 2016, will be the first to be due on April 15, 2017. As such, the 2015 FBAR is still due on June 30, 2016 and is not eligible to be extended. Interestingly, Congress granted first-time FBAR filers an abatement from penalties if they do not meet the new deadline and fail to request an extension. This abatement only applies to taxpayers that file an FBAR by October 15. In effect, the abatement gives first-time filers an automatic extension until October 15 for the 2016 FBAR.