United States citizens, Permanent Residents and U.S. resident aliens who hold assets in foreign institutions have significant yearly reporting requirements that need to be adhered to. The Internal Revenue Service (IRS) and Financial Crimes and Enforcement Network (FCEN) has different reporting requirements for money and securities held in foreign banks than in domestic bank accounts. The value of the foreign accounts, assets, and investments will determine if a U.S. taxpayer is required to file FinCEN Form 114 and IRS Form 8938 or both forms. Failure to file or accurately report can result in fines, penalties, and criminal consequences.
What is FBAR?
FBAR stands for Foreign Bank Account Report and refers to the Financial Crimes Enforcement Network (FinCEN) Form 114. All U.S. taxpayers with an interest in, or signature authority over, foreign financial accounts whose total value exceeds $10,000 USD at any time during the tax year must file FinCEN Form 114 on an annual basis.
Every year, FBAR must be filed through the FinCEN Bank Secrecy Act E-Filing System and IRS Form 8938 “Statement of Specified Foreign Financial Assets” gets filed with the taxpayer’s annual U.S. individual tax return. The latest date to file FBAR and Statement of Specified Foreign Financial Assets is October 15 of the year following the tax year without a penalty being assessed to the taxpayer.
Penalties for Failure to File an FBAR
There are no late FBAR penalties, but non-filing can result in harsh fines. If the non-filing is intentional can result in penalties being assessed anywhere from $100,000 to 50% of the value of the account.
What is FATCA?
The Foreign Account Tax Compliance Act (FATCA) is a U.S. law enacted to discourage the use of foreign financial accounts for offshore tax evasion and stop certain information reporting loopholes. Under FATCA, any non-US bank must declare accounts owned by American citizens worth more than $50,000 or face fines of 30% withholding. U.S. taxpayers must also report their foreign financial accounts and assets by filing Form 8938.
The FATCA applies to individual citizens, residents, and non-resident aliens with taxable interests, but FATCA reporting thresholds are complex.
FATCA Form(s) 8938 is individually reported within Form 1040 to the IRS as part of the annual federal income tax return and is due by April 15.
Penalties for Failure to File Form 8938
For each year, failure to report foreign financial assets, the monetary penalties increase 50% of the value of the assets or $100,000.
Financial foreign assets to on report on Form 8938 (FATCA) and FBAR – Differences and Similarities
Foreign assets to be reported on both FinCEN Form 114 and Form 8938:
- Financial (deposit and custodial) accounts held at foreign banks
- Mutual Funds
- Accounts held by a foreign or domestic grantor trust for which you are the grantor
- Retirement Accounts
- Foreign-issued life insurance or annuity contracts with a cash value
Assets to also report on Form 8938 (FATCA):
- Foreign stocks and securities
- Hedge Funds
- Partnership Interests
- Other Private Equity Funds
Assets to also report on FBAR:
- Accounts where you have a signatory authority
- Assets held in foreign branches of U.S. banks
- Indirect ownership interests or beneficial interests
The IRS provides a detailed comparison of the filing requirement.
The FCEN and IRS wants to ensure U.S. residents and citizens are not hiding assets in foreign accounts. The IRS wants to ensure U.S. residents and citizens pay taxes owed on all of their foreign gains.
For more information on tax implications on your foreign bank account, reach out to us directly, and we can help you out.