FBAR and Foreign Bank Account Reporting — A Complete Guide

What is FBAR and Who Must File?

FBAR is an annual report that must be submitted to the tax authorities regarding foreign bank accounts. If you have a bank account, savings account, investment account, or any other financial account abroad, and the account balance exceeded $5,000 or equivalent foreign currency at any point during the year, you are required to file a report.

It does not matter whether the money in the account belongs to you personally or whether you manage it on behalf of another person. It also does not matter whether you earned money from the account or not. The report is merely about the existence of the account.

Who must file a report? Self-employed individuals and business owners who have foreign accounts; employees who received a pension or payment from abroad and transferred funds to a foreign account; company owners whose companies have bank accounts abroad; associations that have assets abroad; and new immigrants who transferred funds from abroad in the year of immigration or in subsequent years.

In short: if you are uncertain, it is better to report. The report itself is free, and early filing saves trouble.

How Reporting a Foreign Bank Account Works — Step by Step

The report is submitted as part of your annual report to the tax authority. If you are self-employed or a business owner, the report is added to your annual report. If you are an employee, the report is added to your income declaration. If you are a company, the report is added to the company's financial statements.

1. Collect information about each foreign account. For each account, you will need the bank name, country, account type, account number (or other identifier), the balance on December 31 of the reporting year, and the highest balance in the account during the year.
2. Check if you are required to file a report. If the total amount of all foreign accounts exceeded $5,000 or its equivalent in foreign currency at any point during the year, you are required to file a report. If the amount is below $5,000, you are exempt.
3. Complete the reporting form. The form is attached to your annual report. In the form, provide details about each account separately: bank name, country, account type, account number, balance at the end of the year, and maximum balance during the year.
4. Submit the report to the tax authority. The report is submitted through the tax authority's online portal (mas.gov.il). The deadline for submission is typically by the end of April of the year following the reporting year, but verify the exact deadline each year.
5. Keep a copy of the report and supporting documents. If the tax authority asks questions, you will be able to show that you filed the correct report on time.

One point that is not always clear: if you have a joint account with another person (for example, a spouse or family member), you are required to report it in full, even if the funds are not entirely your property. The tax authority wants to know about all accounts you have access to or control over.

What You Need to Know About Taxation and Reporting of Foreign Bank Accounts

Reporting a foreign bank account is not merely an administrative matter. It also relates to income taxation. Any income you earned from a foreign account (interest, dividends, capital gains, or any other income) must be reported to the Israeli Tax Authority. You pay tax on this income at the standard income tax rate, just like income earned in Israel.

If this income is not reported, or if it is reported incorrectly, the Tax Authority may demand payment of unpaid taxes, plus interest and penalties. Penalties for incomplete or late reporting of a foreign account can be substantial — up to 10% of the unreported amount, and in cases of dishonesty, even more.

If you are self-employed or a business owner, and income from a foreign account is related to your business, it is considered business income and must be reported in your annual report. If you are an employee, this income will be reported in your tax return as other income.

Another important point: if you are a new immigrant, there are certain tax benefits in your year of immigration regarding income transferred from abroad. However, these benefits do not apply to income you earned from a foreign account after arriving in Israel. If you are a new immigrant, it is very important to consult with an accountant regarding the taxation of this income.

Common Mistakes and How to Avoid Them

In our work with clients who have foreign accounts, we see recurring mistakes. Here they are:

• Failure to file a report at all. This is the most common mistake. Clients think that if they did not earn money from a foreign account, they do not need to report it. This is incorrect. The report is about the existence of the account, not about income.
• Reporting an incorrect balance. Often, clients use an incorrect exchange rate to convert the balance to shekels, or they use the rate from the wrong date. The Tax Authority requires using the exchange rate as of a specific date (usually, December 31st of the reporting year).
• Overlooking joint accounts. If a foreign bank account is held jointly (for example, with a spouse), both of you must report it in your separate reports. If only one of you reports it, it may appear as if the other is hiding income.
• Forgetting small or old accounts. Often, clients have a foreign bank account they opened years ago and have since forgotten about. If the account is still active, even with a small balance, it must be reported.
• Failure to report income from a foreign account. If you earned interest or dividends from a foreign account, they must be reported separately. Often, clients report the account itself but forget to report the income.
• Late or incomplete reporting in prior years. If you owe reports for prior years and have not filed them, it is important to file an updated report as soon as possible. Delay only increases penalties.

The best way to avoid mistakes? Prepare a list of all your foreign accounts and review it again and again. If you are unsure about anything, ask an accountant before submitting the report.

When Should You Consult an Accountant?

Reporting a foreign bank account can be simple if you have only one account and the income is minimal. However, there are cases where it is very worthwhile to seek professional assistance.

If you have multiple foreign accounts, or if the amounts are large, or if you are self-employed and the income from a foreign account is related to your business, it is advisable to consult with an accountant. An accountant will ensure that you use correct exchange rates, that you report all income correctly, and that you receive all the tax benefits you are entitled to.

Even if there is incomplete or late reporting from prior years, it is advisable to consult an accountant. An accountant can help you file an updated report and explain to the Tax Authority what happened. In some cases, there are ways to reduce penalties if you are willing to correct the mistake yourself.

Even if you are a new immigrant, it is very important to consult with an accountant regarding the taxation of foreign accounts. New immigrant taxation has special rules, and mistakes in the first year can affect many years thereafter.