ABOUT THE AUTHOR: Matt is an Enrolled Agent (EA) with more than 10 years of experience in public accounting. He graduated from Excelsior College in 2007 with a bachelor’s degree in accounting. Matt initially started his career with the Internal Revenue Service as a Revenue Agent. In June 2008, he moved to public accounting with a concentration in tax preparation and consulting. His background includes high net worth individuals, medical, manufacturing and construction small businesses, not-for-profits, partnerships, S-Corps, property and casualty insurance, and foreign compliance reporting for both stateside residents and US Expats.
FBAR and FATCA just might be the two most detested, feared and misunderstood acronyms in the US tax lexicon. Shrouded in mystery and backed by severe penalties, the FBAR (Foreign Bank Account Report) and FATCA (Foreign Account Tax Compliance Act) are at least partially responsible for the record-breaking number of Americans that have been renouncing their citizenship since FATCA was enacted in 2010. Many tax professionals are even hesitant to complete these forms out of fear of making a mistake.
If you are a US tax resident and have a financial interest in or signatory authority over an offshore financial account (e.g. a foreign bank account, pension or brokerage account), understanding FBAR and FATCA requirements is key to avoiding a problem with the IRS or the Financial Crimes Enforcement Network (FinCEN). We’ll differentiate between the FBAR and FATCA and explain what you need to know in order to stay in compliance.
FBAR and FATCA – What Are They? How Are They the Same or Different?
At the most basic level, the FBAR and FATCA are informational self-reporting requirements. The US Government uses these to protect against financial crimes (e.g. tax evasion, money laundering) by US tax residents.
The FBAR was established in 1970 as part of the Bank Secrecy Act. It gained teeth under The Patriot Act as a tool against international terrorism. It is not uncommon for US persons to have financial accounts in foreign countries. But without being required to report them, not many would admit to having them.
The IRS’s attempt to solve this problem is the FBAR. It requires self-reporting by filing FinCEN Form 114 (Report of Foreign Bank and Financial Accounts). The form must be filed each year by anyone with an aggregate balance of more than $10,000 USD in one or more foreign accounts.
FATCA was established in 2010 and requires non-US financial institutions to report on the accounts they hold for US persons. The impact of this requirement has caused numerous headaches for the average US citizen or resident. Since FATCA was implemented, numerous foreign banks now refuse to accept US citizens for anything from a simple bank account to a home mortgage.
FATCA also allows government personnel to locate US persons not living in the United States in order to assess US tax or penalties. As a result, many domestic banks have started closing the accounts of US persons they know to be living outside of the United States to avoid having to comply with FATCA. In addition, FATCA requires individuals with more than $200,000 in foreign assets to self-report all foreign assets. This is done via FATCA Form 8938 (Statement of Specified Foreign Financial Asset) on an annual basis along with their US tax return (Form 1040).
Do I Have to File FBAR?
You are required to file an FBAR form (FinCEN Form 114) if you:
- Are a US person living inside or outside the United States and
- Have an aggregate balance that meets or exceeds $10,000 in your foreign financial accounts – even if it was just one day out of the year.
And yes, that’s $10,000 in all your foreign accounts added together. If you have three accounts with $5,000 in each, your aggregate balance is $15,000. This is $5,000 over the reporting limit and you would be required to file the FBAR for each account.
Do I Have to File FATCA?
FATCA has a higher threshold when it comes to who is required to self-report.
Live Outside of the United States
If you are unmarried or file your taxes separately:
- And have assets valued at over $300,000 on any day of the year or more than $200,000 on the last day of the tax year, you would be required to self-report.
If you are married and file a joint return:
- You can have up to $600,000 on any day of the year or $400,000 on the last day of the tax year before you cross the threshold and need to self-report.
Live in the United States
If you are unmarried or file your taxes separately:
- You will need to self-report all foreign accounts if you have an aggregate balance that meets or exceeds $75,000 anytime during the calendar year, or if you have assets valued at more than $50,000 on the last day of the tax year.
If you are married and file jointly:
- The limits are $150,000 and $100,000, respectively.
Note that if you meet the threshold for FATCA, you still need to file the FBAR as well. You must be in compliance with both reporting requirements.
What Happens if I Don’t File?
There are both civil and even potential criminal penalties and they are substantial.
If you are living outside the United States, it is very likely that you are required to file at least the FBAR and maybe both the FBAR and FATCA forms on an annual basis. The information you provide for FBAR and FATCA do not, in themselves, result in any additional tax burden but failure to file can result in severe penalties.
If you willfully fail to file FBAR:
- Civil penalties can go up to $100,000 or 50% of your account value, whichever is greater and
- In extreme cases, criminal penalties of up to 5 years in prison.
Penalties are also harsh if you do not file FATCA Form 8938:
- There is an initial $10,000 penalty for failing to file that can go up to $60,000 and
- Criminal penalties may also apply.
Oh No! I Haven’t Been Filing Either the FBAR or FATCA, What Do I Do?
First, take a deep breath and consult your tax advisor.
Fortunately, if your omission was not due to willful conduct and you haven’t been previously contacted by the IRS for failure to file an FBAR, the IRS allows non-resident US taxpayers to use its Streamline Filing processes to make amends. You can file up to 6 years of unreported FBAR statements without penalty by filing delinquent FBARs according to the Delinquent FBAR instructions. Attached to each previously unfiled FBAR must be a reasonable cause statement explaining the failure to file. In addition, is the promise to file all required informational returns and FBARs going forward.
For FATCA, if you meet the general eligibility criteria, you might be able to use the IRS’s Streamlined Foreign Offshore Procedure (SFOP). However, determining whether or not you are qualified for SFOP can be tricky. It is best to consult a tax professional with experience in foreign reporting, expat taxes and amnesty programs.
We hope this article has been helpful to outline some of the foreign bank reporting requirements. If you’re worried that you might have missed some filing requirements, having a CPA experienced in disclosure procedures is a must. Please reach out to us if we can assist you.