Because of the increased attention the IRS is giving to holders of overseas bank accounts, many Americans with assets overseas are understandably concerned – and with good reason! The penalties for failing to disclose these accounts can range from $10,000 to as much as one-half of the total account value. Obviously, it just makes sense for these citizens to want to know more about which types of accounts the IRS is seeking, and whether their holdings qualify for greater scrutiny.
Most people who are dealing with FBAR (Report of Foreign Bank and Financial Accounts) issues tend to assume that they have something to be worried about if they have any foreign accounts at all. That may not be the case, however. In fact, the ITS has some very specific regulations on file that go into some detail about which types of overseas assets are subject to those reporting requirements, and which are not.
For example, if you have an account in a large U.S. bank, that is obviously not a foreign account subject to these filing requirements. That means that you can purchase foreign securities through a United States securities broker and not have that portfolio considered a foreign account. That is due to the account itself being held by a financial institution located in the U.S.
By the same token, if you have an account with an American financial institution that chooses to pool your money with other sums outside of the United States, it is likewise not reportable. These omnibus accounts are considered to be outside of your direct control, and thus do not rise to the level of account ownership that the FBAR rules were designed to address.
In those and similar examples, the basic underlying issue comes down to two things: whether the account is located in an institution outside of the United States, and whether the individual in question has the ability to exercise direct control over those account assets.
In the first instance, you could exercise control, but the account is held within an American institution inside the United States. In the second example, your assets might be held in a collective foreign account, but you would only have access to your funds, and then only through your own financial institution. A third example would be cases where you act with signatory authority for an employer’s overseas accounts. Since the account is not yours, you would have no duty to report it.
In the end, these definitions come down to issues of jurisdiction and custodial arrangement. That is why your accounts in foreign banking institutions do fall within the mandates of the FBAR rules. Those accounts are located at foreign institutions, and provide you with direct custodial control over the management of account assets.
As simple and obvious as those examples might seem to be, there can still be room for confusion. That makes it all the more imperative that you consult with a competent professional if you have any questions about whether your accounts need to be reported under FBAR requirements. Getting sound advice now can help you avoid unpleasant conversations with the IRS later.