“A person doesn’t know how much he has to be thankful for until he has to pay taxes on it.” - Anonymous
Americans living abroad have additional reporting requirements that most people living in the States don’t.
One of the most common additional reporting requirements for expats is having to report your foreign financial accounts and assets.
In fact, there are two separate reporting requirements for foreign accounts and assets, and many expats have to report the same information on both. These are known as FBAR and FATCA reporting.
FBAR and FATCA mean more form filing for expats, but no additional tax implication. There are stringent penalties for not filing them, though.
They are intended to help combat money laundering, so, like video cameras in public spaces, they seem inconvenient at first but soon fade into the background of life abroad.
It’s also important to be aware that the US Treasury and the IRS are able to check whether you’re reporting all of your foreign accounts and assets, and they can verify your foreign account balances.
In this article, we’ll look at the reporting requirements, how they came about, and how the IRS can enforce them.
In this article, you’ll learn about:
• What is an FBAR?
• Who has to file an FBAR?
• What is a foreign financial account?
• How to file an FBAR
• FinCEN Form 114 instructions
• FBAR filing deadlines, and penalties for not filing
• What is FATCA?
• FATCA foreign asset reporting requirements
• Filing IRS Form 8938 instructions
• FATCA enforcement and penalties
• FBAR and FATCA differences summary
What is an FBAR?
An FBAR, or Foreign Bank Account Report, is a form the US government requires Americans with overseas accounts to file annually. It was introduced in 1970 to help prevent offshore tax evasion.
Don’t forget that FBAR filing doesn’t carry any new tax implications as it’s just a reporting requirement, though an important one, as penalties for not filing FBARs are significant!
Who has to file an FBAR?
Any American who has over $10,000 in total at any moment in a year in financial accounts registered in foreign countries is required to submit an FBAR.
The figure stayed at $10,000 since 1970, rather than rising with inflation, so it now catches many more expats in the FBAR reporting net.
It doesn’t stop at individuals though, as any American-owned tax-paying entity such as a trust or company is required to submit the same form under the same guidelines. This maximum balance can exist in one account or across multiple accounts, but once an American individual or entity crosses the $10,000 threshold, they’ll need to file or risk a penalty.
FBAR Filing Example: Jason lives in France working remotely for a US employer. He’s paid into a US bank account, but has a local bank account in France for his day to day spending needs, with a balance that doesn’t normally exceed $10,000. However, he decides to buy an apartment in France, and transfers the deposit across, which exceeds the $10,000 FBAR filing threshold, even though it’s just in his account for a few hours, making him liable to file an FBAR and report his French bank account.
Sue meanwhile relocated permanently to Italy, where she opened checking, savings, and brokerage accounts. While none of the individual account balances exceeded $10,000 in the first year, the combined balances do, so Sue has to file an FBAR to report all three accounts, too.
What is a Foreign Financial Account?
The term ‘foreign financial account’ covers several different types of accounts. While many people would correctly assume that a foreign checking or savings account qualifies, so do:
• Foreign stock and brokerage accounts
• Individual retirement accounts
• Mutual funds
• Joint accounts
• Any other bank or investment accounts you have signatory authority over even if it isn’t registered in your name, such as company, charity, or trust accounts, as well as any accounts you may have opened for your children, where you currently hold custodial and signature authority.
Expats often wonder whether you have to report crypto accounts on an FBAR, and the answer (as of 2022) is yes, if a crypto account is held in an offshore exchange, account, or fund, but no if held in a private wallet at home.
How to file an FBAR (FinCEN Form 114)
Filing an FBAR means filing FinCEN Form 114. You can file your FBAR on the FinCEN website directly, or ask your tax professional to do it for you.
"The information you’ll need to provide includes the account name and number, the type of account, the maximum balance of the account during the year, and the name and address of the financial institution where your accounts are held. You’ll need to provide this information for every foreign financial account you have." - Joshua Reeve, Moore DM
When providing foreign account balances, you have to convert foreign currencies into their closest whole number dollar values.
FBAR filing deadlines, and penalties for not filing
FBAR filing deadlines for expats are slightly different to tax return deadlines. Whereas tax filing is due on June 15th for expats, with an extension to October 15th available on request, the FBAR (FinCEN Form114 ) deadline is April 15th with an automatic extension to October 15th. In practice, most expats file both their tax return and FBAR at the same time.
The penalty for not filing an FBAR unknowingly is $10,000 a year, and the penalty for not filing when you do know you can be $100,000!
Mistakes on the form carry the same penalties.
The US government is receiving the same information reported on FBARs from foreign bank and investment firms directly, so it’s able to check FBAR filing accuracy, globally.
What is FATCA?
FATCA, or the Foreign Account Tax Compliance Act, was passed by congress in 2010 to address some of the same issues as the FBAR, albeit in a different manner.
FATCA created a new reporting requirement for many expats, though for reporting foreign financial assets to the IRS, rather than financial accounts to FinCEN. There is often overlap in practice, though.
FATCA also created the means for Uncle Sam to check on both by compelling foreign financial firms to report their American accounts holders’ information. How can a US law compel foreign companies, you might think - the answer is by imposing a tax on those that don’t comply when they trade in US dollars, which all foreign financial firms need to.
FATCA foreign asset reporting requirements
FATCA reporting means filing IRS Form 8938 when you file Form 1040.
One small piece of good news for some expats is that FATCA has higher minimum reporting thresholds than FBAR.
These thresholds are also higher for expats than for Americans resident in the US. For expats, FATCA reporting is required for any American living abroad who has a total of $200,000 of offshore financial assets at the end of the year, or $300,000 at any given time during that year. Like FBAR, the thresholds are per person, not any individual account.
If you are married and filing a joint tax return, then that threshold is bumped up to $400,000 on the last day of the year and $600,000 at any point in the year.
Note that currently (as of 2022), the IRS considers crypto held in an offshore account to be reported on Form 8938.
Filing IRS Form 8938 instructions
Form 8938 isn’t a simple form to fill out, and it’s always worth asking your tax professional for assistance. Similarly to FBAR, you’ll need your foreign account and brokerage records for the year to hand, so you can provide information about where your accounts are held, and your balance details.
FATCA enforcement and penalties
The penalties for not following FATCA guidelines are not as severe as the FBAR’s, but neither are they insignificant, ranging from $10,000 to $50,000, depending on the situation.
If you haven’t been filing FBARs, there is a voluntary amnesty program available if the IRS hasn’t contacted you yet, so consult a tax professional as soon as possible if this is you.
FBAR and FATCA differences summary
FATCA - for reporting offshore financial assets. Higher minimum reporting thresholds for expats of $200,000 at the end of the year or $300,000 at any time in the year, per person. Form 8939 is filed to the IRS as part of your tax return, due by June 15th (unless you request an extension). Spouses can file jointly (with doubled thresholds). FACTA reporting requirements also apply to accounts held in US overseas territories (i.e. Puerto Rico, Guam, American Samoa, the US Virgin Islands, and the Northern Mariana Islands).
FBAR - for reporting offshore financial accounts. The reporting threshold is just $10,000 per person (or entity, such as an American-owned corporation). Form 114 is to be filed to FinCEN by October 15th. Spouses must file separate FBARs. You must include any account that you have signatory authority over. FBAR doesn’t include US overseas territories.
If you have any questions, don't hesitate to contact us.
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