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Foreign Account Reporting on Forms Fincen 114 (FBAR) and 8938 (FATCA) (and the differences between them)

 

 

 

 

IJ Zemelman

 

Various recent efforts by the IRS and Department of Treasury to ensure that all US Citizens and Green Card Holders with foreign financial accounts are compliant with FATCA (Foreign Accounts Tax Compliance Act) regulations have left many US Expats with mixed feelings and some confusion. We at Taxes for Expats have received numerous questions about filing requirements on foreign financial accounts.

 

Most of the questions we receive have to do with the difference between Fincen 114 (FBAR) and Form 8938 (introduced in 2012). Not only do filing thresholds vary for different taxpayers, there are also differences in the types of accounts which need to be reported on each form and how each form needs to be filed. As such, we felt it was important to make all US Citizens and Green Card Holders aware of updated filing requirements and specify the difference between Form Fincen 114 and Form 8938.

 

First and Most Important: One Does Not Replace the Other

If you have one or more foreign bank accounts or other financial accounts (investment accounts, trust accounts, mutual funds, etc) valued at $10K or more at any time during the calendar year you are required to file Form Fincen 114 with the US Department of Treasury.

 

If the balance of your foreign financial account(s) is significantly higher than $10K, you will be required to file Form 8938 with the IRS along with your US income tax return. Your requirement to file Form 8938 isn’t limited to financial accounts, however; you are required to report valuable assets, as well.

 

Depending on whether you’re a US Expat or an American Citizen living in the United States and whether you’re filing an individual income tax return or joint return, your filing thresholds will be as follows:

 

  • Stateside Taxpayer Filing an Individual Tax Return: Aggregate foreign financial account balance of $50K on the last day of the year or aggregate total of $75K or more at any time during the calendar year.
  • Stateside Taxpayer Filing a Joint Return: Aggregate foreign financial account balance of $100K on the last day of the year or aggregate total of $150K or more at any time during the calendar year.
  • Expat Taxpayer Filing an Individual Tax Return: Aggregate foreign financial account balance of $200K on the last day of the year or aggregate total of $300K or more at any time during the calendar year.
  • Expat Taxpayer Filing a Joint Return: Aggregate foreign financial account balance of $400K on the last day of the year or aggregate total of $600K or more at any time during the calendar year.

 

Who is Required to File?

US Citizens and Green Card Holders who have any interest whatsoever in one or more foreign financial accounts with balances above $10K will be required to file Form Fincen 114. Interest may either be in the form of signature authority or actual financial interest. If you have no financial interest in the foreign bank account but you have signature authority over the account, you will still need to include it in your FBAR.

 

Only foreign financial accounts from which the proceeds (interest, withdrawals, dividends, etc) would go directly to the taxpayer and therefore be mandatory information on a US income tax return are required on Form 8938. If you simply have signature authority over a foreign financial account and you have no financial interest in the account, you will not need to report it on Form 8938 and it will not be used to determine your filing threshold. If you have foreign assets such as investments, securities or stocks which are not held in a foreign financial institution you will also be required to report this information.

 

Although most FATCA enforcement is intended to track down noncompliant US Citizens and Green Card Holders, they’re not the only ones required to file an FBAR. Nonresidents, for example, who are filing a joint return with an American Spouse are required to report qualifying foreign financial accounts to the Department of Treasury. There are other situations, as well, in which a Nonresident may have joint financial interest in a foreign account with an American Citizen – in which case the Nonresident would be required to file Form Fincen 114 and Form 8938 if account balance thresholds were met.

 

If you are a Resident of a US Territory or Commonwealth you will be required to file an FBAR but you are currently not required to file Form 8938 despite the value of your foreign financial accounts.

 

What Information is Required on Each Form?

To complete Form Fincen 114 you will need to review your monthly account balance statements over the year to find the highest balance. You will also be asked to provide account details such as account number, the financial institution at which the account was held, and any other account holders associated with each account.

 

To complete Form 8938 completely and accurately, you will need to have monthly account statements for any qualifying foreign financial accounts and a fair market value assessment of any valuable foreign investments. You will also need to provide information on the type and location of each foreign asset and include information of any individual or company who has shared interest.

 

Both forms require financial information in USD. To complete each form accurately, use the end of year international exchange rate to convert totals from foreign currency.

 

Due Dates for Each Form

  • FBAR (Form Fincen 114) is due by June 30th, with no extensions.  Starting in 2017 (for tax year 2016), the due date will move to April 15th with an extension available until Oct 15. 
  • Form 8938 is due when you file your US income tax return. If you qualify for a tax return filing extension on your US income tax return, you also qualify for a filing extension on Form 8938.

 

Penalties Associated with Each Form

The maximum financial penalty for failure to file an FBAR is either $100K or up to 50% of the taxpayer’s foreign assets – whichever balance is larger. Maximum penalties for failure to file an FBAR can also include criminal charges being filed. These stiff penalties are generally reserved for those who appear to have willfully disregarded their responsibility to file Form Fincen 114 and report foreign financial accounts. Even non-willful noncompliance, however, can lead to a financial penalty of up to $10K.

 

The maximum financial penalty for failure to file Form 8938 is $60K for each foreign asset you failed to report. There is an initial $10K ‘Failure to Disclose’ fee and another $10K fee added for each 30 day period in which Form 8938 is not filed after having received notice from the IRS. Like Form Fincen 114, failure to report required information may result in criminal pursuit.

 

Specific Items or Accounts to be Reported

Account to be reported on Form Fincen 114:

  • Checking account held in a foreign domiciled bank
  • Savings account held in a foreign domiciled bank
  • Checking account held at a foreign branch of a US domiciled bank
  • Savings account held at a foreign branch of a US domiciled bank
  • Foreign financial account over which you have signature authority
  • Foreign securities or stock held in a foreign financial institution
  • Foreign accounts owned by a foreign entity in which you have least 50% financial interest
  • Foreign mutual funds
  • Foreign accounts held by either a foreign or domestic trust with which you are associated
  • Foreign life insurance policy with cash value
  • Foreign annuity contract

Accounts or items to be reported on Form 8938:

  • Checking account held in a foreign domiciled bank
  • Savings account held in a foreign domiciled bank
  • Foreign mutual funds
  • Foreign financial accounts held by either a foreign or domestic trust with which you are associated
  • Foreign hedge funds
  • Foreign private equity funds
  • Foreign life insurance policy with cash value
  • Foreign annuity contract

Zemelman

I.J. Zemelman, EA is the founder of Taxes for Expats
She may be reached at: +1-646-397-2887
Email: questions@taxesforexpats.com
Web site: www.taxesforexpats.com