To fully understanding your legal duty with respect to disclosing a foreign account on an FBAR, it is first necessary to understand the instructions promulgated by the IRS to prepare an FBAR. A person must file an FBAR informational return if all of the following conditions are met: (1) a “U.S. person”; (2) had a “financial interest” in, or “signature authority” over, or “other authority” over; (3) one or more “financial accounts”; (4) located in a “foreign country”; (5) the aggregate value of such account(s) exceeded $ 10,000; (6) at any time during the calendar year.

Calculating the FBAR penalty is a veritable trap for the unwary. The most common mistakes that I see people make relate to the following issues:

(1) To the extent that a foreign account is reportable, the amount that must be reported is the “maximum value of the account.” What is the maximum value of a foreign financial account? It is defined as “a reasonable approximation of the greatest value of currency or nonmonetary assets in the account during the calendar year.” How does one determine the maximum value of a foreign financial account? First, determine the maximum account value of the account during the year. Second, convert the maximum account value – for each account – into U.S. dollars using the exchange rate in effect on the last day of the calendar year.

(2) Although it might appear as though a foreign account does not need to be reported if its highest balance falls below $ 10,000, this is only partially true. Beware of the aggregate maximum aggregate value rule! The following example illustrates how the rule works. Assume that John has three foreign accounts, the highest balances of which never exceed $ 10,000 (USD). The highest balance in each account is $ 9,000. Although none of the accounts by themselves trigger an FBAR reporting duty because no single account exceeds the $ 10,000 reporting threshold, together they do. Indeed, the highest aggregate balance of the three accounts is $ 27,000. Therefore, all three accounts must be reported on an FBAR, even though none of them alone triggers an FBAR reporting requirement.

(3) An FBAR violation can occur in one of two ways: (1) first, by failing to disclose a foreign account on an FBAR altogether and (2) second, by disclosing a foreign account on an FBAR but underreporting the correct amount (i.e., the maximum value during the calendar year). It is the latter violation that many people are unaware of. Nary a day goes by that I don’t talk to a client who thinks that as long as the account has been disclosed, there can be no violation, even though the amount was underreported. That is nothing more than a myth. An example will help drive home this point. If Jason reports $ 50,000 (USD) as the maximum value of his offshore account but the maximum value is actually $ 150,000 (USD), he has committed an FBAR violation, notwithstanding the fact that Jason properly disclosed the account on an FBAR.

(4) A person has a “financial interest” in a foreign account not only if he is the owner of record or holder of legal title, but also if he maintains the account jointly with another person. There are additional ways in which a person can have a “financial interest” in a foreign account for purposes of satisfying this rule but I am merely going to focus on the concept of joint ownership of an account. Very simply, to the extent that two people jointly maintain a foreign financial account, then each U.S. person has a financial interest in that account and each person must report the entire value of the account on an FBAR. An exception applies for the spouse of an individual who files an FBAR. The spouse of an individual who files an FBAR is not required to file a separate FBAR if: (1) all the financial accounts that the non-filing spouse is required to report are jointly owned with the filing spouse; (2) the filing spouse reports the jointly owned accounts on a timely filed FBAR; and (3) the filers have completed and signed Form 114a, Recording of Authorization to Electronically File FBARs. Otherwise, both spouses must file separate FBARs and each spouse must report the entire value of the jointly owned accounts.

(5) That the foreign account generated no interest income or negligible interest income is not a defense to failing to disclose the account on an FBAR. As the IRS has said time and time again, no amount of unreported income is considered de minimis for purposes of determining whether there has been tax non-compliance with respect to an account or asset.

(6) Outside of the OVDP, FBAR penalties are not limited to one year. Indeed, they can be asserted for multiple tax years – up to six – because the statute of limitations for asserting an FBAR penalty is six years from the date of the violation.

(7) What is the date of a filing violation? Contrary to popular belief, it is not the last day of the calendar year. Instead, it is June 30 of the year following the calendar year for which the account is being reported. This is the last possible day for filing the FBAR so that the close of the day with no filed FBAR represents the first time that a violation has occurred.