FBAR; FINCEN; FATCA– these are all part of the alphabet soup taxpayers are faced with when trying to decipher their US tax filing obligations. Many expats are left scratching their heads – wondering what each acronym means and if they need to file FBAR, FATCA, or both. Let’s unravel the acronyms together!
What is FBAR?
Foreign Bank Account Reporting (“FBAR”) was introduced by the Bank Secrecy Act of 1970 with the intention of discouraging and preventing tax evasion. While largely ignored for many years, FBAR has been in the forefront in recent years, with the US Government now placing a lot more emphasis on the importance of compliance. The threat of harsh penalties has prompted a massive increase in reporting lately, and many people taking advantage of the voluntary disclosure programs the IRS has in place once they realize they need to file FBAR.
What is FINCEN?
FinCEN is simply the Treasury Department’s Financial Crimes Enforcement Network, and it is the organization that enforces FBAR compliance. Their mission is “to enhance U.S. national security, deter and detect criminal activity, and safeguard financial systems from abuse by promoting transparency in the U.S. and international financial systems.” FinCEN Form 114 is another name for the FBAR!
What is Form 8938?
The Foreign Account Tax Compliance Act (“FATCA”) was enacted in 2010 as part of the HIRE Act, and requires that foreign financial institutions report on foreign assets held by their US account holders or be subject to withholding on certain payments. The HIRE Act also includes legislation requiring US persons to report their foreign financial accounts and assets, which is where Form 8938 comes in. US taxpayers now use Form 8938 to satisfy their FATCA reporting obligations by submitting the form with their annual federal income tax return.
Is there a difference?
In short, yes. While both forms may seem to be collecting the same information, there are some subtle – and not so subtle – differences of which every taxpayer needs to be aware. The requirement to file one form does not automatically mean you are required to file the other. The differences and similarities between Form 8938 and FBAR are highlighted below.
|Who must file?
|Specified individuals (U.S. citizens, resident aliens, and certain non-resident aliens) and domestic entities that have an interest in specified foreign financial assets and meet the reporting threshold.||U.S. persons (U.S. citizens, resident aliens, trusts, and estates) that have an interest in foreign financial accounts and meet the reporting threshold.|
|For specified individuals living in the US:
– Unmarried individuals (or those who file MFS): total value of assets more than $50,000 on the last day of the tax year, or more than $75,000 at any time during the year.
– Married individuals: total value of assets more than $100,000 on the last day of the tax year, or more than $150,000 at any time during the year.
Those living outside of the U.S.
– Unmarried individuals (or those who file MFS): total value of assets more than $200,000 on the last day of the tax year, or more than $300,000 at any time during the year.
– Married individuals: total value of assets more than $400,000 on the last day of the tax year, or more than $600,000 at any time during the year.
The aggregate value of all foreign financial accounts exceeds $10,000
|What is reported?||Maximum value of the specified foreign financial asset||Maximum value of the foreign financial account|
|When is the form due?||The form is due with your federal tax return, including extensions.||The form is due April 15 (April 17 in 2018), with an automatic extension to October 15 available.|
|Where is it filed?||With your federal income tax return||Filed electronically through FinCEN’s BSA E-Filing System|
|Up to $10,000 for failure to disclose and an additional $10,000 for each 30 day period of non-filing for a potential maximum penalty of $60,000. Criminal penalties may also apply.||Civil monetary penalties are adjusted annually for inflation. The current penalty for non-willful failure to file is $10,000. A willful failure to file penalty is the greater of $100,000 or 50% of the account balances. Criminal penalties may also apply.|
Remember, not all accounts and/or financial assets need to be reflected when determining your filing obligation for each form. A financial asset that is reported on Form 8938 (FATCA) does not necessarily need to be reported on your FBAR form and vice versa. The table below outlines what needs to be considered for each when verifying your obligation.
|Financial accounts held at a foreign financial institution||Yes||Yes|
|Financial accounts held at a foreign branch of a US bank||No||Yes|
|Financial accounts held at a US branch of a foreign bank||No||No|
|Foreign financial account for which you have signature authority||No, unless you have an interest in the account as described above||Yes|
|Foreign stock held in a foreign brokerage account||The account is reportable; however, the stock within the account does not need to be reported separately||The account is reportable; however, the stock within the account does not need to be reported separately|
|Foreign stock held outside a foreign brokerage account||Yes||No|
|Foreign partnership interests||Yes||No|
|Foreign mutual funds||Yes||Yes|
|Domestic mutual funds that invest in foreign stock||No||No|
|Foreign accounts non-accounts investments held by foreign or domestic grantor trusts where you are the grantor||Yes for both||Yes for foreign accounts|
|Foreign-issued life insurance or annuity with cash value||Yes||Yes|
|Foreign hedge and private equity funds||Yes||No|
|Foreign real estate held directly||No||No|
|Foreign real estate held through a foreign entity||No; however, the foreign entity is a specified foreign financial asset and its value will include the value of the real estate||No|
|Foreign currency held directly||No||No|
Want to know more about your specific reporting requirements?
Our expat-experts are happy to help you determine if you need to file FBAR, Form 8938, or both. Contact us today!