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As you prepare to file your federal tax return and related documents with the IRS, it is important to be aware that the federal government imposes mandatory reporting requirements for broad categories of foreign financial accounts and other assets in which you have an interest, in addition to paying taxes on income generated by such holdings. Find out whether you need to file a Report of Foreign Bank and Financial Accounts (FBAR), Form 8938 under the Foreign Account Tax Compliance Act (FATCA), or both.
The IRS has a number of ways it tracks and taxes foreign assets and accounts held by U.S. taxpayers. Some, like the Foreign Account Tax Compliance Act (FATCA), add pages to your tax return. But FBARs are a separate filing all together. Failure to file either one could result in substantial fines, penalties, or even criminal consequences.
The Report of Foreign Bank and Financial Accounts (FBAR), now FinCEN Form 114, is a form that must be filed with the Financial Crimes Enforcement Network (FinCEN) each year to comply with provisions of the Bank Secrecy Act of 1970. It discloses foreign financial interests and signatory authority over foreign financial accounts.
The Foreign Account Tax Compliance Act (FATCA) is a law that empowers the IRS to investigate and penalize tax evasion by U.S. taxpayers with financial assets overseas. Form 8938, the Statement of Specified Foreign Financial Assets, is an attachment to your federal tax return on which you must disclose those assets to enable the IRS to ensure that any taxes on income earned on those foreign assets have been paid.
While the FBAR and FATCA reporting requirements are similar, there are several significant differences. You could own assets that must be disclosed on one but not the other, or must be disclosed on both.
The FATCA applies to individual citizens, residents, and non-resident aliens with taxable interests. FBARs are required for a broader range of entities, including trusts, estates, and domestic entities with interests in foreign financial accounts. Residents and entities in U.S. territories also have to file FBARs, but not FATCA forms.
You must control a certain dollar amount in foreign assets or accounts before the reporting requirements kick in. For FBAR, this is a cumulative value of $10,000 in any accounts at any time during the year. For FATCA, the reporting thresholds are more complicated:
The FATCA applies to foreign assets in which your beneficial interest is of a type that would require you to report any gains, losses or distributions on your federal tax return, whether or not there is any actual gain loss or distribution to report. FBARs apply any time you are the owner of record or title holder for a particular account. You will also have to file an FBAR if you or your agent or representative has signature authority or direct control over the foreign account even if you have no personal financial interest in the account.
There are some types of assets that must be reported on both FInCEN Form 114 and Form 8938:
There are some types of assets that are only reported on one form, and not the other. The FATCA requires disclosure of:
On the other hand, FBARs are required for:
Foreign assets which are generally non-reportable include:
As recently as May 2016, the deadline to file an FBAR was June 30 of the following year. However, starting in 2017, FBARs will need to be completed, along with Form 8938 and your federal tax returns, by April 15. But while, you can file for an extension of your FATCA forms along with your tax return, the IRS has not historically allowed FBAR extensions.
When you file FATCA forms, they are attached to your tax returns and filed directly with the IRS. However, FBARs are filed online with the Financial Crimes Enforcement Network (FinCEN).
If you miss your deadline to file FATCA forms or FBARs, you could face fines, penalties, and criminal consequences. But the amounts of those penalties can vary.
FATCA penalties are up to $10,000 for failure to disclose assets, plus an additional $10,000 for each 30 days you fail to file after receiving notice from the IRS. The maximum you could be required to pay for FATCA violations is $60,000.
FBAR penalties depend on whether the failure to disclose is willful or non-willful. Non-willful penalties may be up to $10,000. If your failure to file is deemed willful, you could be required to pay $100,000 or 50% of the account balances.
No summary can cover every situation where a U.S. taxpayer will, or will not have to file foreign asset disclosures. The only way to know for sure if you have to file FATCA forms or FBARs is to get clear advice from a tax preparer or tax attorney with foreign asset experience. The April 15 deadline is coming faster than you might realize. Contact an experienced tax attorney to get clear advice before the deadline to save yourself from expensive penalties.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding FBAR requirements or penalties, contact Joe Viola to schedule a consultation.