FBAR confusion due to offset mortgage

Hi everyone,

My husband (UKC) and I (dual US/UK citizen) have a joint offset mortgage account.  The balance on our bank statement shows as a huge negative as it reflects the amount we owe on the house.  Our interest gets offset by the amount we have in our current account/savings account.

We thought this was the first year we needed to file an FBAR because we have finally managed to save some money- and when both of our paychecks go in, the total we have in the current accounts (or accounts we have access to) would exceed $10,000 even if only for a few days.  On top of that, my husband travels a lot for work and sometimes gets expenses paid into our account, which often amount to over £1000 a time.  Of course, this is money he has paid out already and is claiming back, but as far as the IRS is concerned it might look like it is money coming into our account.

Therefore, it is really hard to calculate how much we have in our account at any given time.  We were thinking of identifying the amount paid in (in a given month) and just reporting on that figure (nevermind the fact that it all gets paid back out to bills etc), plus an estimate of our savings in 2011.  We cannot calculate the exact amount we had saved in each month in 2011, because we have a tendency to save, then take it back out to pay for something that crops up unexpectedly, and our statements are reported in a way that we have no way of getting an exact amount at a given moment in time.   I was going to send them a cover letter and spreadsheet to try to explain this along with my FBAR form.  Does this sound reasonable? 

I'd be happy to report the amount of money we were offsetting the mortgage with, but really have no idea how to calculate it.  This is an area I'm really confused about- do I need to report it?  We cannot directly access this money the way we can in our current/savings accounts but I have a feeling it might need to be reported. And if so, then we might have needed to report in previous years, which really scares me.  Is the amnesty program already over or is there still a way to report for back years? 

The other thing we are now suddenly panicking about is that a few years ago my husband sold our brother in law a car (that we had a loan on).  So, my brother in law transferred about £4000 into our account that we used immediately to pay off the loan.  But that transaction may have put our balance over the $10,000 threshold momentarily.  We think this took place in November of 2009.  Any advice on whether we should report that? At the time we probably had no savings but if the car money went in near pay day, it might have pushed us over. At this time we had no idea about the FBAR filing requirements either.  I know that is no excuse, but it is only now that we have even thought about it!
 
Any advice greatly appreciated. Looking for the best way to avoid jail and huge penalties. . . 

This is my opinion; anyone can feel free to correct or elaborate.

Don't over analyze the FBAR. Go back to the instructions, and whether the aggregate value of your accounts were $10K or more at any point in time, which they likely were based on what you said. I'm assuming you have access via your bank to statements that includes daily balances? Look through the statements and find the maximum amount for EACH account. The form asks for the maximum value of the account - it's a point in time, and it doesn't matter about the day before or the day after, or whether you immediately 'spend' the money. The FBAR doesn't ask what day of the year or where the money came from, never mind where it is going.

Actually as I re-read this, you seem to have a current account, savings account and an offset mortgage account. The current and savings are simple - max value during the year. Someone else needs to chime in about how to report the offset mortgage account.

With respect to 2009, go back and verify that your aggregate exceeded the threshold. If you need to file, then do so per this IRS instruction.

Q. What happens if an account holder is required to file an FBAR and fails to do so?

A. Failure to file an FBAR when required to do so may potentially result in civil penalties, criminal penalties or both. If you learn you were required to file FBARs for earlier years, you should file the delinquent FBAR reports and attach a statement explaining why the reports are filed late. No penalty will be asserted if the IRS determines that the late filings were due to reasonable cause. Keep copies of what you send for your records.

Again, my opinion, someone else may be able to clarify and correct.

Thank you very much for your reply. 

Our current, savings and offset accounts are all in one account (which ironically, is called 'the one account'!)  So our statements never show a daily balance, and the amount we owe on the mortgage constantly fluctuates based on the amount we have in the account and the interest rate (I think they calculate this daily).

We can probably figure out our savings/current account for the purpose of reporting as we have statements with all income and outgoings,  but as you point out, the tricky bit will be figuring out how to report the offset amount.  This hurts my brain.

Once we figure that out, we can hopefully work backwards to figure out if we should have been reporting it earlier.  Again, trying not to overcomplicate things, but it seems that the filing requirements are kind of complicated and our bank account is definitely complicated when it comes to trying to report for FBAR!

Again, any help appreciated.  Might have to consult an international accountant to avoid penalties. . .

Just curious how you calculate and report the foreign mortage gain on your 1040 each year. Are you reporting this on the "other income" line of your 1040?

(According to IRS Revenue Ruling 90-79, this is taxable on each mortgage gain you make.)

Guya- you are scaring me.  I am now totally confused and want to cry.

I have never reported anything like that on my 1040 because I didn't think we had made any 'gains.'  We are still living in the flat that I'm talking about (we haven't sold it- which is when I would have assumed the 'gains' came into play).  In fact, it is currently worth less than we paid for it.  Although, because we have been overpaying our mortgage each month, we will hopefully make some money when we go to sell.  Is a gain the amount you walk away with when you sell, or is a gain the amount you sell it for minus what you have paid? If the latter, then we will have made a loss.

So we pay our mortgage fee each month (more than what they recommended us to pay).  This helps reduce the amount that we owe - are you saying this can be seen a as a gain?

Any money we have saved plus what we have in our current account earns about 4% interest (although this fluctuates based on the UK base rate).  Sadly, most of our current account goes on bills, but it will accrue some interest on a monthly basis (so it earns interest when it first goes into our account, which gets offset against what we owe on our mortgage).  It was only last year that we actually had any savings, and that was about £1000-£2000.  So at most, the amount we would have earned on our savings would be between £40 and £80 annually.  Would they really expect to see this kind of thing on my 1040?

Confused.  Hate taxes.   

I am also curious as I thought the 'gain', if any, was upon sale and repayment, not the monthly payments.

Makes me glad we paid cold hard cash for our house, never mind that the value has since gone way down.

Suppose you borrow £1000 when £1 = $2 and pay it back when £1 = $1.50. In Sterling, there is no gain or loss but in Dollars you "made" $2000-$1500 = $500.

Supposedly, you are supposed to report this phantom gain. I suspect very few expats actually do this.

I have an offset mortgage but mine is simpler - just savings that offsets the mortgage. I've always done something like Vadio suggests - I get monthly statements, and just took the highest amount of savings (ie, credit) shown on those statements. Thinking what I'd do in your shoes, I'd take the highest amount that I could find in my documents regardless of the sources.  I have also at various times had to ask my mortgage companies to send me specific statements, eg, 'what was x on 31 December', and they've been quite accomodating. Where FBAR asks what kind of account is it, I've just said 'offset mortgage account'. (There's only one number for my mortgage and the savings). I can't say this is correct - all I can say is that it's honest and the best I could come up with.
I too am curious about the 'gain'. I know you have to declare gain (if you have one) when you remortgage or sell, but what's the taxable event in this scenario?

Good point, Weller.

Marty- thanks, that's really helpful advice. I think I'll do something similar.  In the meantime, I've contacted greenback taxes, I might just pay for their advice for peace of mind.

I also signed a petition about FATCA and FBAR through American Citizens Abroad:

http://www.aca.ch/joomla/index.php?option=com_content&task=view&id=466&Itemid=2

I read the ruling, and I thought it was 'paper gain' on a sale and final repayment. Maybe I am missing something, but I can't see a 'gain' on monthly payments. Impossible to calculate. But I am not a tax professional, so my views don't count as anything but my views.

One thing I would do is call the FBAR helpline before I engage a professional. The number is on the IRS website.

Hi everyone,
The other thing we are now suddenly panicking about is that a few years ago my husband sold our brother in law a car (that we had a loan on).  So, my brother in law transferred about £4000 into our account that we used immediately to pay off the loan.  But that transaction may have put our balance over the $10,000 threshold momentarily.  We think this took place in November of 2009.  Any advice on whether we should report that? At the time we probably had no savings but if the car money went in near pay day, it might have pushed us over.

You probably know this, but you'd first want to find out what date the #4000 appeared on your account, then find the exchange rate for that day - google "historical exchange rates" and that will lead you to various sites that will give you that information - and then see how much the balance was in dollars.

Hi all, just wanted to share that I called the FBAR helpline.  They asked for my name and phone number.  I explained the situation about my offset mortgage account and the man I spoke to, while pleasant, really was not helpful.  His advice was to estimate how much we had our the account and just report the estimated figure. Oh really? (!?!?)

He said if I have a delinquent year (I explained about the car loan thing of 2009) that I should include an old form with a cover letter explaining why I'm filing it late.  I told him that in 2009 I hadn't even heard of FBAR and it was only because I happened to see on this forum that it was a requirement!! Otherwise I would have had no idea.  I also asked him if he could feed back my feelings on the scary penalties for Americans abroad and the fact that more than 1/2 the money in my account is earned by my husband who is not American and should not be subject to US tax law, but his bank account is because my name is on it.

Sorry for the rant.  I do not feel confident about the advice he gave, I think I'm going to organise a consultation with greenback so I can be sure about what I'm doing.  Thanks again for all of your help.

 I also asked him if he could feed back my feelings on the scary penalties for Americans abroad and the fact that more than 1/2 the money in my account is earned by my husband who is not American and should not be subject to US tax law, but his bank account is because my name is on it.

Sorry for the rant.  I do not feel confident about the advice he gave, I think I'm going to organise a consultation with greenback so I can be sure about what I'm doing.  Thanks again for all of your help.

I assume you file "married separately" and you can simple divide up the accounts so your husband is not caught in the IRS net.

Thanks, nun. For the taxes I select married filing separately.  I only report my own income. It's the FBAR I was referring to, &  it was my understanding that they don't care whose money it is if you have access to/signature authority over the account and are a US citizen, they want to know about it. My concern is that I get it wrong & suddenly they can take huge fees (ie DH would be caught in IRS mess!) its the horror stories that make me panic.

Fill out the FBAR with a sensible number and file it today. Move on.

US tax law for us is vague. There are answers which are surely wrong but none that are surely right. Opinions differ and you can drive yourself crazy (and spend a lot of money) trying to get a definitive ruling.

The whole thing is like the fear of crime. You should lock your doors and stay out of dark alleys but there is no 100% defence. It's unhealthy to obsess about it. Just accept there's a risk and get on with your life.