If you have a business outside of the United States but are a US person, you have to pay tax on your foreign accounts – FATCA reporting. The Foreign Account Tax Compliance Act (FATCA) is a significant development in U.S. efforts to combat tax evasion by U.S. persons holding accounts and other financial assets offshore.
Under FATCA, certain US taxpayers will need to report their foreign financial assets on Form 8938, and certain foreign financial institutions must report directly to the IRS any information about US-held financial accounts.
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FATCA and FBAR Filing
Whether you live in or outside of the US, if you have assets or accounts based in a foreign country, you probably have FBAR filing requirements. Foreign financial accounts, such as bank accounts, mutual funds and brokerage accounts, must be reported to the Treasury Department.
The FBAR began as part of the Bank Secrecy Act of 1970 to prevent the hiding of assets overseas in order to avoid US taxes. The details of FBAR filing can be complicated, and due to a lot of misunderstanding and confusion, there has been widespread non-compliance. Many American citizens living abroad were unaware of their FBAR filing requirements or thought the IRS would not be able to find out what was in their foreign accounts.
When the Foreign Account Tax Compliance Act (FATCA) was made law in 2010, two provisions affected expats:
1. Every foreign bank and investment firm now provides to the US Treasury account information for US citizens, allowing the IRS to check it against the information provided on FBARs or to see if an FBAR should have been filed but wasn’t.
2. FACTA created an additional filing requirement for US citizens with foreign financial assets – Form 8938, Statement of Specified Foreign Financial Assets. Americans living abroad with a total value of financial assets abroad exceeding the reporting threshold at any point during a year must report this by filing IRS Form 8938 with their federal tax return.
FACTA Reporting Thresholds for Form 8938
Taxpayers living abroad:
For FATCA reporting purposes, you are considered to live abroad if you are a U.S. citizen whose tax home is in a foreign country, and you have been present in a foreign country or countries for at least 330 days out of a consecutive 12-month period.
If you are single or married filing separately, you must submit Form 8938 if you have more than $200,000 of specified foreign financial assets at the end of the year and you live abroad.
If you’re filing jointly with your spouse, the thresholds double. You’re required to file if the total value of your specified foreign financial assets is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year. This threshold applies even when only one spouse lives abroad.
Taxpayers living in the US:
If you are single or married filing separately, you must submit a Form 8938 if you have more than $50,000 of specified foreign financial assets at the end of the year, or more than $75,000 at any time during the tax year, and you live in the US.
If you’re filing jointly with your spouse, you’re required to file if the total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.
Do Spouses Filing Joint Returns Need to File Two Form 8938’s?
Married couples who file joint income tax returns only need to file a single Form 8398 for the tax year. This form will report all of the specified foreign financial assets that either spouse has an interest in.
What Are Specified Foreign Financial Assets?
Specified foreign financial assets include foreign financial accounts and foreign non-account assets held for investment (as opposed to held for use in a trade or business), such as foreign stock and securities, foreign financial instruments, contracts with non-U.S. persons and interests in foreign entities.
Asset Valuation
You’ll need to calculate the value of your specified foreign financial assets to know if the total value exceeds the threshold applicable to you.
A reasonable estimate of the highest fair market value of the asset during the tax year is usually reported, but special rules apply to ease valuation burdens. You can rely on periodic financial account statements (provided at least annually) to determine the maximum value of a financial account.
You can calculate the fair market value of a specified foreign financial asset based on information that is publicly available from a reliable or verifiable source of financial information. If there’s no reliable information available, a reasonable estimate of the fair market value will suffice for reporting.
Will the IRS Find Out if I Fail To Report Foreign Accounts in Accordance With FBAR Filing Requirements?
Since the FATCA came into law, the IRS is easily able to discover non-compliance. The provisions of FATCA reporting require foreign financial institutions to collect and report information on accounts owned by US persons to the IRS. This information is easily accessible to the IRS in order to cross-reference with the information you provide – so it’s best to report your own non-compliance in order to avoid harsh criminal and civil penalties.
The statute of limitations for Form 8398 audit is 6 years after you file your return if you omit from gross income more than $5,000 that is attributable to a specified foreign financial asset. If you fail to file or properly report an asset, the statute of limitations is 3 years from when you provided the information.
Penalties for Failing to File Form 8938
If you fail to comply with your Form 8938 reporting requirements, you could face the following penalties:
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- a $10,000 failure to file penalty
- an additional penalty of up to $50,000 for continued fail to file
- a 40% penalty on tax-attributable assets
Do I Need to File FBAR and Form 8938?
Unfortunately, filing Form 8938 does not relieve you of your FBAR reporting requirements. If you meet the account thresholds for both the FBAR and Form 8938, you’ll need to file both. Taxpayers with specified foreign financial assets that exceed certain thresholds must use Form 8938 to report these assets. Although there is duplicate reporting on this additional form, you still need to file FinCen Form 114. Certain foreign financial accounts are reported on both Form 8938 and the FBAR.
Exceptions From Needing To Report Form 8938
If you’ve reported specified foreign financial assets on other forms already, you won’t need to report them again on Form 8938. These include interests in:
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- Trusts and foreign gifts reported on Form 3520 or Form 3520-A (filed by the trust);
- Foreign corporations reported on Form 5471;
- Passive foreign investment companies reported on Form 8621;
- Foreign partnerships reported on Form 8865; and
- Registered Canadian retirement savings plans reported on Form 8891.
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When Do I Have an FBAR Filing Requirement?
When a US person or entity:
1. Has a financial interest in or signature authority over a foreign financial account outside of the US
2. The aggregate value of all foreign financial accounts is more than $10,000 at any point within the calendar year. Even if no single account exceeds the value of $10,000, be mindful that the aggregate could be over this threshold.
Even if the foreign account does not produce any taxable income during the year, it is still held to the reporting requirements. Signature authority does not mean that you have to be the owner of an account.
In order to calculate the maximum value of your accounts throughout the year, review your account statements or request the amounts from your financial institution. You must report this value in USD. For the FBAR exchange rate, use the Treasury year-end exchange rate.
What It Means To Have Financial Interest in or Signature Authority Over a Foreign Account
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- When a taxpayer, their agent, or representative is the owner of record or holder of a legal title.
- When the taxpayer has sufficient interest in the entity that is the owner of the record or legal titleholder.
- When a taxpayer has the authority to control the disposition of account assets.
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Which Financial Accounts Are Reportable on the FBAR?
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- Bank accounts: including checking accounts, savings accounts and time deposits.
- Securities accounts: including brokerage accounts and securities derivatives.
- Cryptocurrency: including Bitcoin.
- Mutual funds or similar pooled funds.
- Commodity options or futures accounts.
- Insurance policies with a cash value.
- Any other accounts with a foreign financial institution
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How to File the FBAR:
You must file the FBAR with the Treasury Department and not with the IRS with your federal income tax return. The FBAR is sent electronically with the Financial Crimes Enforcement Network’s BSA E-Filing System.
What Are the Consequences of Not Filing Fbars or Reporting Foreign Accounts?
If you fail to comply with FBAR requirements, you face serious penalties and fines from the IRS. You could face huge monetary penalties and criminal charges.
Civil penalties for non-willful failure to file FBAR can be up to $13,481 per violation – this means even if it was due to an honest misunderstanding. For willful failure, the penalty can be up to $134,806 or 50% of the account balance, per violation.
Criminal penalties for wilfully failing to file or maintain records while violating other laws can include fines of up to $500,000 and imprisonment of up to 10 years, in addition to civil penalties.
Wilfully failing to file or maintain records can land you with up to 5 years in prison and a fine of up to $250,000.
What To Do if You Haven’t Filed Fincen Form 114 or Reported Foreign Financial Accounts?
If you discover that you have delinquent FBARs, you need to act on this immediately. You should file an FBAR form in a previous year electronically using the BSA E-Filing System website as soon as possible. You’ll be able to enter the calendar year for which you are reporting and an explanation for delinquency. The IRS will then determine whether you had reasonable cause for late filing, and if so, you will not face a penalty assessment. Contact a tax professional to minimize the risk of FBAR penalties.
Note: This article is provided for general information purposes only and is not to be considered tax or legal advice. Consult with your tax advisor for specific advice that applies to your situation.
