Foreign Bank Account Reports (Form 114) and the Foreign Account Tax Compliance Act (Form 8938)
Over the past several decades the US Congress has made substantial efforts to eliminate the use of foreign financial assets to evade applicable US taxes.
Since 1970 there has been a requirement for US persons with bank accounts held in foreign countries to disclose these accounts on the Foreign Bank Account Report, or FBAR (formerly Form TD F 90-22.1, now FinCEN Form 114). For nearly 40 years it was a largely unknown and forgotten compliance requirement, but in the post-financial-crisis anti-tax-evasion world the government has increased efforts to enforce the law. Indeed, in 2008 the IRS issued a press release reminding those US taxpayers with foreign bank accounts of the reporting obligations, as well as the consequences of not reporting (which can be severe—see below). At present, the reporting threshold is a US person with foreign accounts which in total exceed $10,000 in aggregate value at any time during the year.
In 2010 Congress introduced the Foreign Account Tax Compliance Act (FATCA) and its associated Form(s) 8938, Statement of Specified Foreign Financial Assets. FATCA is designed to force foreign financial institutions to report to the IRS in the same way as domestic US ones. It has a broader remit than FBAR and requires disclosure to the IRS of foreign financial accounts and other financial assets not held in an account. This means not only currency and assets held in foreign bank/custodial accounts, but also assets such as shares and bonds not held in custodial accounts (e.g. share certificates). The reporting thresholds are much higher, and account for whether the taxpayer lives abroad or in the US. The FATCA rules for individuals are applicable from Tax Year 2011 going forward.
The primary difference between FBAR and FATCA is that the Form 114 is an information return that is reported to the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”), while the FATCA Form(s) 8938 are additional scheduled items individually reported within the Form 1040. The FBAR is not filed with the Form 1040—it is sent separately to the Treasury’s FinCEN. The FinCEN wants to make sure you are not hiding any foreign assets; while the IRS wants to make sure you are paying all the tax you owe on gains in your foreign assets. Furthermore, the filing deadline for the FBAR is June 30th of the following year (and is not extendable), while the FATCA deadline is the same as the 1040 and enjoys the same extended deadlines.
There is a large amount of overlap between the FBAR and FATCA reporting requirements but not all of the terminology and definitions are the same, resulting in substantial confusion. The majority of people who require FATCA compliance will also require FBAR, but many FBAR filers do not have to file FATCA.
FBAR Filing deadline – June 30
Form 8938 (file with your tax return) – April 18, 2016; June 15, 2016 for expats; or October 17, 2016 if you file an additional extension.
FBAR – Report of Foreign Bank and Financial Accounts
You must file an FBAR if both of these are true:
- You’re a U.S. taxpayer.
- You own or control foreign bank and financial accounts with a combined value over $10,000.
File the FBAR separately from your tax return. The United States must receive it by June 30. The reporting requirement covers many types of foreign accounts maintained outside of the United States, including:
- Bank accounts
- Securities accounts
- Certain foreign retirement arrangements
Who should file
You’re probably required to file a FBAR if you’re:
- A U.S. citizen or resident living abroad
- Using foreign accounts for everyday activities
While this requirement isn’t new, expats and their tax advisors often overlooked it in the past. Recent international enforcement efforts have raised awareness of the requirement. Now, all expats should be certain they’re compliant.
This is only an informational document. No additional tax is going to be added. However, severe penalties can be levied against taxpayers who fail to file or file late. So, it’s important to work with an expat tax advisor who understands your obligations.
A $10,000-per-year penalty can apply even if your failure to file a FBAR is an oversight. If the IRS can show you purposely avoided the FBAR reporting obligations, the penalties can be as high as:
- $100,000, or
- 50% of the greatest value of the account
Taxpayers who intentionally avoid FBAR reporting can face criminal charges.
FBAR penalties can only be waived if the taxpayer shows reasonable cause for failing to file. Reasonable cause findings rely on a great number of facts. The IRS decides reasonable cause. So, even expats living abroad who’ve been compliant with local tax obligations can be out of compliance with the FBAR requirements. These factors are taken into account by the IRS when analyzing whether a taxpayer acted reasonably:
- Background and education
- Whether there was a tax deficiency related to the unreported foreign account
- Failure to disclose the existence of the account to tax professionals
If you haven’t filed required FBAR reports in prior years, you should act quickly. Consult an expat tax advisor to discuss your compliance options.
FATCA – Foreign Account Tax Compliance Act
Foreign Account Tax Compliance Act (FATCA) is a product of United States’ efforts to combat offshore tax evasion. U.S. expats of all income levels with foreign accounts and assets need to be conscious of its impact. FATCA brings about two notable changes that affect all expats:
- U.S. taxpayers with foreign accounts and assets might need to file Form 8938: Statement of Specified Foreign Financial Assets with their returns.
- Financial institutions must report information about U.S. citizens who have accounts with the institutions.
File Form 8938 with your return. It was first required in 2011. You must file Form 8938 each year it applies to you. Form 8938 is the same as an FBAR in many ways. However, it requires you to disclose certain “nonaccount” assets like:
- Business and trust ownership
- Certain contractual investments with foreign parties
You must file form 8938 if the value of your reportable foreign assets exceeds either of these levels:
- More than $50,000 — $100,000 if married filing jointly — at the end of the year
- $75,000 — $150,000 if married filing jointly — at any time in the year
Expats living abroad all year have an increased reporting threshold. They don’t need to complete this form unless their foreign assets are valued in excess of either:
- $200,000 — $400,000 if married filing jointly — at the end of the year
- $300,000 — $600,000 if married filing jointly — at any time during the year
Financial institution reporting
New rules on financial reporting will affect expats. However, the effects will be indirect. Some foreign financial institutions must report on U.S. citizen and resident clients who have accounts worth more than $50,000. If you’re an expat who hasn’t been filing returns and FBARs, this could affect you. Ex: The foreign banks you use might be required to obtain additional information about you. They would report this information to the U.S. government. The IRS could figure out you’re not in compliance before you report yourself. In that case, many of the preferential disclosure options will be unavailable to you. You might face additional tax, penalties, and interest.