Taxes are not the only thing the US Government tracks when it comes to expats. Foreign financial accounts are also tracked and reported due to FATCA – the Foreign Account Tax Compliance Act. Many rumors and myths fly regarding FATCA, so here is a breakdown of the laws.
What is FATCA in Simple Terms?
The Foreign Account Tax Compliance Act, or FATCA (commonly pronounced Fat-Ka), was put into law in March 2010. It created new information reporting and withholding for payments made to certain foreign financial institution and foreign entities. FATCA is designed to make it easier for the US Government, specifically the IRS, to keep track of US persons and businesses who are earning income from investments/deposits in foreign bank accounts.
FATCA is not administered by the IRS; it is run by a different agency within the US Treasury Department – the Financial Crimes Enforcement Network, or FinCen. While FinCen is not a part of the IRS, they can and do share information at times.
Who Is Affected By FATCA?
It’s important to know if you are affected by FATCA, so you can be sure to have everything you need to file in a timely manner. If one or more of the following apply to you, you will be affected by FATCA:
- US persons, defined as either US citizens or resident aliens (Green Card Holders), are required to be in compliance with FATCA regulations regardless of where in the world they live
- Businesses owned by US persons or who have a majority shareholder that is a US person
- Foreign financial institutions including banks, investment houses, and any other institution that accepts or holds monies
- US banks and investment houses that deal with foreign banks and financial institutions
- Worldwide governments
In this article, we will focus on the individual filing requirements for FATCA.
FATCA Filing Requirements for Dummies
Individuals with foreign bank or investment accounts must file a FinCen Form 114 if the accounts meet the reporting threshold amount. FinCen Form 114 was previously named FBAR, and is still known by this name, even though the former FBAR forms are no longer used.
There is no minimum or maximum age for filing FBAR forms. If the US person is incapable of filing the forms themselves, their guardian is required to file for them.
For individuals, the reporting threshold is $10,000 US dollars. If the total of all the bank/investment accounts goes over $10,000 at any point during the year, all the financial accounts need to be reported to FinCen on the FBAR.
If there is any income (such as interest and dividends) from the bank/investment accounts, it needs to be reported on a timely filed tax return in order to avoid penalties and interest from the IRS.
The FBAR form must be filed electronically with FinCen – paper filed forms are not accepted. Generally, professional tax preparers can file FBAR forms electronically. Individuals can also register with FinCen at the BSA website.
What is considered a foreign bank account?
Here is a list of the types of accounts that are considered foreign financial accounts and would need to be reported on a FBAR:
- Financial (deposit and custodian) accounts held at foreign financial institutions
- Financial accounts held at a foreign branch of a US financial institution
- Foreign mutual funds
- Stocks or securities held at a foreign financial institution
- Foreign-issued life insurance or annuity with a cash-out value
Accounts not considered to be foreign bank accounts and do not need to be reported on an FBAR:
- Financial accounts held at a US branch of a foreign financial institution
- US mutual funds that invest in foreign stocks and securities
- Foreign stock and securities not held in a financial institution
- Foreign real estate held directly or through a foreign entity
- Foreign currency, precious metals and gems held directly
What information is needed to file a FBAR form?
In order to file an FBAR form, you will need the following information:
- Your name, social security number and address
- The name, social security number (if applicable) and address of any joint owners of the account
- Type of bank account – Deposit (checking, savings, etc.), Securities (stocks and mutual funds), Other (any other type of account that does not fit with deposit or securities)
- Bank account information
- Name and address of the bank
- Account number
- Maximum value of the account during the calendar year, converted to US dollars. You will need to convert using the US Treasury Department’s year-end exchange rate (even if the max value was during the year). You can find the year-end rates here.
- Number of joint owners of the account
Jointly owned accounts
All foreign bank accounts need to be reported on the FBAR form, but extra consideration needs to be made for accounts held jointly with another person. If both account holders are US persons, then both people will need to file separate FBAR forms, each reporting the full value of the account on their forms.
Special considerations are made for spouses with jointly owned accounts. If the following conditions are met, then spouses can file a single FBAR form for the year:
- All the accounts are either jointly owned or held separately by a single spouse. Only one spouse in the couple can have separately held bank accounts.
- The FBAR is timely filed with proper signatures.
- Filers have a completed and signed form 114a (Record of Authorization to Electronically File FBARs) in their records. This form does not need to be sent to FinCen. This form is just a record that both spouses allowed the filing of a joint FBAR form. This form should be kept in your records, and given to FinCen should it be requested.
When to File
Knowing filing deadlines is critical, as you don’t want to wait until the last minute – or worse, miss the deadline altogether!
The FBAR deadline is April 15. If you are a US citizen living outside the US on the due date, an automatic two-month extension of time to file is given. An additional extension can be filed, extending the due date to October 15.
While these due dates are the same as a US individual tax return, the FBAR must still be filed separately from the tax return.
Not filing your FBAR form can open you up to severe penalties. Even though FBAR forms are not filed with the IRS, the IRS has been given the authority to assess and collect civil penalties for FBAR violations. There are two types:
Non-willful violations – those not intentionally done – can face up to a $10,000 penalty each year of non-filing.
Willful violations – those who intentionally/voluntarily avoid filing FBAR forms in order to avoid paying tax on income – can face a penalty of up $100,000 or 50% of the balance in the account at the time of the violation.
While the FBAR filing requirement has been around since the 1970s, many people are only just finding out about them. Oftentimes, US expats find that they have not filed FBAR forms for many years that required filing. FinCen understands that many people may need to “catch up” on their filings, and as such have created programs to help file delinquent FBARs without facing penalties.
If the US person is also delinquent on their tax return filings, they can use the Streamlined Filing Compliance Procedures to file all their delinquent forms. Generally, these programs require you to file 6 years of delinquent FBAR forms, along with the delinquent tax returns.
If just the FBAR forms are late, then it’s possible to file your FBAR forms late without entering the Streamlined Filing Compliance Procedures. In order to file your delinquent FBARs separately, you will need to meet all these requirements:
- Have not filed a required FBAR form
- Are not under examination by the IRS (civil or criminal)
- Have not already been contacted by the IRS about the delinquent FBAR forms in question
If you meet all the requirements, you will need to follow these steps to resolve delinquent FBAR forms:
- Review the instructions
- Include a statement explaining why you are filing the FBARs late
- File all FBARs electronically at FinCEN
- On the cover page of the electronic form, select a reason for filing late
IRS Form 8938
In addition to filing the FBAR form, declaring your foreign financial accounts, you may also be required to file an additional form with your tax return. This form, IRS Form 8938 – Statement of Specified Foreign Financial Assets, is similar in nature to the FBAR form, but is reported directly to the IRS. This form not only reports the balance of your foreign financial accounts, but it also lists the taxable income associated with each account. The Form 8938 and the FBAR cannot be substituted for one another.
There are some differences in the forms, and what needs to be reported on each one. The filing threshold is also different, and is dependent upon your filing status and whether you live in the US or abroad.