Do you operate foreign bank accounts, own assets, or engage in international financial dealings? The IRS expects you to report such transactions and also pay taxes on any income they generate. These requirements are part of the Bank Secrecy Act (BSA) and the Foreign Account Tax Compliance Act (FATCA). The federal government passed these pieces of legislation to curtail money laundering and other financial crimes.
What is FBAR?
If your international financial dealings are worth over $10,000, the IRS requires you to provide a yearly Report of Foreign Bank and Financial Accounts (FBAR). Doing so through FinCEN Form 114 helps you comply with the requirements of the Bank Secrecy Act of 1970. These annual filings with the Financial Crimes Enforcement Network (FinCEN) disclose your monetary interests and the relevant signatory authority.
What is FATCA?
Congress passed the Foreign Account Tax Compliance Act (FATCA) in 2010. The law requires non-US financial organizations to identify accounts held by US citizens. They should also disclose this information to the IRS just as a US financial institution would. If you own currency and other assets in foreign countries, you’re required to outline them via Form 8938. Also known as the Statement of Specified Foreign Financial Assets, it’s an attachment that you submit together with your tax returns.
Requirement Differences
Although FBAR and FATCA have some overlapping features, they also have differences. The main one is that you report FBAR with Form 114 to the Treasury Department (FinCEN), while FATCA’s Form 8938 is an attachment that you submit to the IRS within Form 1040. Other differences include:
Who Files: FATCA is primarily applicable to individual taxpayers who are US citizens and residents. You must also comply if you’re a non-resident alien with taxable financial assets. FBAR covers entities such as estates, trusts, and other holdings with foreign fiscal interests. Although residents and entities of US overseas territories are required to comply with FBAR, they’re exempt from FATCA regulations.
Thresholds: FBAR demands disclosure if your foreign assets are cumulatively worth at least $10,000. FATCA has more comprehensive reporting thresholds. If you’re unmarried, you should disclose any assets worth at least $75,000 any time of the year or $50,000 at the end. These amounts rise to $300,000 and $200,000 respectively if you’re a foreign resident.
If you’re married and filing jointly, the threshold is $150,000 at any time of the year or at least $100,000 at the end. This limit rises to $600,000 and $400,000 respectively if you’re foreign residents.
Type of Interest: Some disclosures are specific to FATCA. They include private equity funds, foreign securities, and partnership interests. FBAR applies to assets in overseas branches of American banks and accounts with your signatory authority. Examples of non-reportable foreign holdings are real estate, foreign currency, art, and jewelry that you hold directly. Some foreign asset disclosures appear on both Form 8938 and Form 114. Apart from financial accounts, they include mutual funds, retirement accounts, and life insurance with a cash valuation.
Filing Deadlines: The IRS requires all taxpayers to submit their FBAR reports and FATCA disclosures by April 15 together with their tax returns. While it’s possible to receive an extension for the latter, the agency rarely extends this privilege for FBAR submissions.
Penalties for Not Filing: Although missed deadlines attract penalties for both FATCA and FBAR, the amounts can vary. FATCA violations attract a maximum fine of $60,000. It includes a $10,000 fee for failure to disclose eligible assets and a similar amount every 30 days you don’t comply after being notified by the IRS. FBAR penalties can be significantly higher depending on circumstances. For willful failure, you could pay $100,000 or half the value of the foreign assets. Non-willful failure attracts penalties of up to $10,000.
How a Professional CPA Can Help
Every financial situation is unique. That’s why you need a tax professional to offer customized solutions. CPA’s and EA’s understand the complex and ever-changing tax code provides immeasurable benefits as you make foreign investments. You can always consult them for advice to ensure you never encounter the IRS’s notices, audits, penalties, fines, and criminal proceedings. Hire a qualified and licensed expert to experience financial peace of mind.