Confused about the difference between FATCA and FBAR? Don’t get caught in the crossfire of incorrect filings and penalties. As an expat, it’s essential to understand the Foreign Bank Account Report and FATCA Form 8938 – the two most common forms you may need to file if you have money in foreign financial accounts. This blog post will guide you through the basics of FBAR and FATCA, provide tips for ensuring compliance, and highlight common mistakes to avoid.
What is FBAR, and who is required to file it?
An FBAR is a report that must be filed with the U.S. Treasury Department by certain U.S. persons who have a financial interest in or signature authority over foreign financial accounts. FBAR stands for “Report of Foreign Bank and Financial Accounts.” The purpose of the FBAR is to help the U.S. government identify and combat money laundering, terrorist financing, and other financial crimes. By requiring U.S. persons to report their foreign financial accounts, the U.S. government can better track the flow of money into and out of the United States.
What is FBAR reporting threshold?
The threshold for filing an FBAR is generally met if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. However, there are some exceptions and special rules that may apply depending on the specific circumstances.
You’ll be required to file FBAR if all of the following are true:
● You’re a U.S. citizen, permanent resident, or domestic business entity
● You own, control, or have signature authority over a foreign bank account/s and/or other foreign financial accounts.
● The combined value of those foreign financial accounts exceeded $10,000 at any point during the tax year.
Keep in mind – if your balance hits $10,000 for a short amount of time (like one day, or even just one minute), you’ll still need to file the FBAR.
FBAR filing deadline
FBAR must be filed annually with the Financial Crimes Enforcement Network (FinCEN) by the individual taxpayer’s tax return due date, April 18. Taxpayers living overseas will be granted an automatic extension until October 15.
The penalties for failing to file an FBAR can be severe and can vary depending on the specific circumstances of each case. Your FBAR is only an informational document so no additional tax will be assessed on the amount. However, failing to file or filing late can result in significant penalties. The penalties for willful failure to file can be substantial, with a potential penalty of $100,000 or 50% of the account balance, whichever is higher. If the failure to file is not willful, the maximum penalty is capped at $10,000 per year. In addition to penalties, failure to file or filing late may also result in criminal charges, such as tax evasion. As a result, it is crucial to take FBAR reporting obligations seriously and ensure timely compliance to avoid penalties and legal issues.
How to file FBAR?
To file the FBAR, you’ll need to use FinCEN Form 114. The FBAR is filed separately from your federal income tax return and does not go to the IRS, but to the Department of Treasury. Filing FBAR is pretty straightforward. All you need to do is gather all relevant information about your foreign financial accounts and submit it electronically through FinCEN’s BSA e-filing system.
Alternatively, you can have a certified tax preparer do it for you. If you choose to do so, you will simply need to file FinCEN Form 114a, which gives them permission to submit the report on your behalf. If you prefer to file your FBAR in paper form, you’ll need to contact FinCEN’s Resource Center to request an exemption from electronic filing.
What information must be reported on the FBAR?
The following information must be reported on the FBAR:
1. The name on the account
2. The account number
3. The name and address of the foreign financial institution where the account is held
4. The type of account (e.g., checking, savings, securities, or other)
5. The maximum account value during the calendar year being reported
Related: What document do I need for filing an FBAR?
What is FATCA?
FATCA stands for the Foreign Account Tax Compliance Act and it is a US law that requires foreign financial institutions (FFIs) to report information about their US account holders to the US Internal Revenue Service (IRS). FFIs are required to enter into agreements with the IRS and report information about their US account holders, including the account holder’s name, address, taxpayer identification number (TIN), account number, and account balance. FFIs that do not comply with FATCA may face a 30% withholding tax on certain US-source income and payments.
Keep in mind – Form 8938 does not relieve filers of FBAR filing requirements!
If you have a financial interest in or signatory authority over an offshore financial account, you must report the foreign accounts on an FBAR as well as form 8938.
What is the FATCA filing requirement?
US taxpayers are required to report information about their foreign financial accounts on Form 8938, Statement of Specified Foreign Financial Assets (aka FATCA) if they meet the reporting thresholds which can vary depending on the taxpayer’s residency status, filing status, and location of the foreign financial assets.
If you live within the U.S. for the entire tax year, you must file Form 8938 if the value of your reportable foreign assets exceeds either of the following thresholds:
● More than $50,000 at the end of the year ($100,000 in case of married taxpayers filing jointly), or
● More than $75,000 at any point during the year ($150,000 in case of married taxpayers filing jointly)
Expats living abroad have an increased reporting threshold. You don’t need to file FATCA Form 8938 unless your foreign assets exceed either:
● $200,000 at the end of the year ($400,000 if married filing jointly), or
● $300,000 at any point during the year ($600,000 if married and filing jointly)
What are FATCA penalties?
US taxpayers who fail to file Form 8938 when required may be subject to a penalty of $10,000. If the failure continues for more than 90 days after the IRS provides notice of the failure, additional penalties may apply. The penalty can increase up to $50,000 for continued failure to file after IRS notification.
Related: What to Do if the IRS Freezes Your Assets as an Expat?
How to file From 8938?
Filing Form 8938 requires you to gather information about your foreign financial assets, complete the form accurately, and attach it to your income tax return.
By following these steps, you can ensure that you are in compliance with IRS requirements for reporting foreign financial assets:
1. You will need to have information about your foreign financial assets, including their value, the name and address of the financial institution where they are held, and other details about the account. You may also need to convert foreign currency values to U.S. dollars using the current exchange rate.
2. Once you have gathered all the necessary information, you can complete Form 8938. The form requires you to provide personal information, details about your foreign financial assets, and other information that may be relevant to your tax situation.
3. Attach Form 8938 to your tax return: After completing Form 8938, you must attach it to your federal tax return. If you file your tax return electronically, you should follow the instructions provided by your tax software to attach the form. If you file a paper return, you should attach the form to the front of your return.
4. File your income tax return: Once you have attached Form 8938 to your tax return, you can file your tax return using the appropriate method. If you file electronically, you will receive confirmation that your return has been accepted. If you file a paper return, you should mail it to the appropriate address.
Related: FBAR VS Form 8938: A side-by-side comparison
In summary, as a US expat with foreign financial accounts, it’s important to understand both FBAR and Form 8938 reporting requirements and ensure that you are in compliance with both. While both FBAR and Form 8938 require reporting of foreign financial accounts and assets, there are some important differences to be aware of. For example, the reporting thresholds for Form 8938 are generally higher than for FBAR, and Form 8938 reporting is used for tax purposes, whereas FBAR is focused on anti-money laundering measures. Additionally, FBAR is filed with FinCEN, while Form 8938 is filed with the IRS. Failure to comply can result in significant penalties and legal issues, so it’s important to consult with a qualified tax professional to ensure that you are meeting all of your reporting obligations.