Our CPA firm office prepares a lot of the FinCEN 114 and 8938 forms—which are the forms you use to comply with the “Foreign Bank and Financial Accounts” rules (aka FBAR) and with the “Foreign Account Tax Compliance Act” rules (aka FATCA).
Accordingly, in this week’s blog post, we describe the FBAR and FATCA requirements in a bit of detail, including their brutal penalties. We also cover briefly what information you need to disclose to either the U.S. Treasury or the Internal Revenue Service to comply with FBAR and FATCA.
FBAR in a Nutshell
If you have either a financial interest or signature authority in one or more foreign financial accounts and the aggregate value of all accounts at any time during the year exceeds $10,000, the FBAR rules say that you need to disclose your foreign accounts to the U.S. Treasury. Seriously. Every single one.
And just so there’s not confusion, the term “financial account” doesn’t just mean what you might normally think of as a “bank account” (savings, checking, brokerage accounts, etc.) but also includes things such as life insurance policies and shares you own in mutual funds.
Note: If you have any questions as to whether a particular foreign account or asset qualifies as a “financial account” under FBAR and FATCA definitions, or whether you have a “financial interest in” or “signature authority over” a particular account, ask your accountant for help clarifying matters. (If we do your tax return, call us and ask… Please!)
If you do need to disclose an account or accounts, you do so using a special online form, the FinCEN 114, which is available at www.fincen.gov.
The FinCEN 114 form is due by June 30 of the year following the year you have the account. For example, to disclose any accounts that in 2014 had balances cross the $10,000 threshold, you or your accountant prepare and file the FinCEN 114 by June 30, 2015.
FATCA in a Nutshell
The FBAR requirement isn’t the only foreign account disclosure you need to take care of, however.
If you file your tax return as a single taxpayer and at any time during the year the total balances of all your foreign financial accounts cross over a $75,000 limit or if the total balances at the end of year equal or exceed $50,000, you need to disclose each of your foreign accounts inside your regular 1040 tax return on a Schedule 8938 and then cross-reference each account and its annual income to a line on your Schedule B, D or E form.
Married filing joint taxpayers use higher, doubled, thresholds: A “married filing joint” couple needs to report on their foreign accounts if the total combined balances across all accounts equals $150,000 or more or if the year-end balance equals $100,000 or more.
Why the FBAR and FATCA Requirements Exist
So maybe this is obvious, but there is sort of a compelling reason the U.S. Treasury and the Internal Revenue Service want to know about your foreign financial accounts. They want to make sure you’re reporting any investment income from these foreign financial and bank accounts on your tax return.
In other words, just to make this clear: If you have a bank account in some other country (like the country where you were born and where you spent the first decades of your life), you need to report the income from that non-U.S. account on your U.S. tax return, even if you already paid income taxes to the home country on this income.
Note, however, that if you did pay taxes to the home country, you get to claim a foreign tax credit on your U.S. tax return, so you won’t end up getting taxed twice on the same income. (You claim this foreign tax credit on a Form 1116 inside your regular tax return.)
Harsh Penalties for Ignoring FBAR & FATCA
You might be tempted to ignore the FBAR and FATCA rules. But resist the temptation—and here’s why: The penalties for ignoring the FBAR and FATCA requirements add up horribly fast.
The penalty for not timely filing the FinCEN 114 or 8938 form, for example, gets assessed in $10,000 increments.
Please note: We’re not saying the penalty equals $10,000. Rather, we’re saying the penalty gets assessed $10,000 a whack.
For example, the Treasury might assess you $10,000 for not disclosing a bank account on a FinCEN 114. Or the IRS might assess you $10,000 for omitting the form 8938 from your tax return. And then the Treasury or IRS might assess the penalty again if you don’t belatedly make the disclosure or fix your tax return form omission.
And it gets worse. A willful failure to file the FinCEN 114 may lead to catastrophic penalties: The civil FBAR penalty can equal the greater of $100,000 or 50% of the maximum account balance in a year.
Example: If you had $400,000 in some offshore non-U.S. retirement account and didn’t disclose the account, you could get hit with a $200,000 penalty. That’s per year. So if you held this account for (say) ten years, your total penalty might equal $2,000,000 or five times the $400,000 account balance.
Willful failure to file FinCEN 114 might even possibly result in criminal penalties, which run up to $250,000 or 5 years in jail or both.
You can see, obviously, why people worry. And you can understand why increasingly people with dual citizenship (citizenship in both Canada and the US, say, or in both Ireland and the US) are renouncing their US citizenship. Yikes.
If you’re caught up in the FBAR or FATCA swamp, know you have our sympathy.
Preparing the FinCEN 114 and 8938 Forms
If there’s a bit of good news in all this stuff, it’s maybe this: preparing the actual FinCEN 114 and 8938 forms isn’t technically difficult—even if the preparation does take a bit of time if you’ve got a bunch of foreign financial accounts.
You just need complete information on every foreign account you either have a financial interest in or signature authority over, including:
- The name of the financial institution where the account is held
- The address of the financial institution where the account is held (you should try to get a street address if possible, as opposed to a P.O. box)
- The account number
- The type of account it is (bank account, securities account, or “other”)
- The currency the account is maintained in
- The maximum value of the account at any point during the year in the currency it is maintained in (you or your accountant will convert the amount to USD when preparing the form using the appropriate exchange rate)
- Whether the account is a jointly-held account, and if so the number of joint owners and the name, taxpayer ID number, and address of the principal joint owner
- The taxpayer ID number can either be a social security number, ITIN, or foreign taxpayer ID number
- For the principal joint owner’s address, you should first try to get a street address for them in the U.S., if they have one. If they have no U.S. street address, the next best address will be a U.S. mailing address, such as a P.O. box. If they have no U.S. mailing address, you can use a foreign address.
- Whether this account is one in which you have signature authority, but no financial interest.
- (For the 8938) The exact amount of investment income earned on the account
Final Comments and Caveats
Two closing comments—the first a really quick point: We suggest you over-disclose when completing either the FinCEN 114 or 8938 form. For example, some bank account with, like, a dollar or two? Or some term life insurance policy that could–if looked at a certain way–be considered sort of a financial account? Just disclose this stuff. Why risk a penalty?
A second and final comment: You may not be able to do this, but one practical response to the FBAR and FATCA disclosure requirements is reducing or even eliminating the foreign bank accounts and financial accounts you hold. Obviously, this doesn’t work for everybody. You probably can’t, for example, reside in Canada and not have a Canadian bank account. But if you’re now operating only in and residing primarily in the US, you may just want to move all of your bank accounts and financial accounts to the US.