The IRS and Department of Treasury have undertaken multiple steps lately to enforce the FATCA compliance among the US citizens and green card holders. Most US expats are aware of the FBAR form 114 (Report of Foreign Bank and Financial Accounts). However, the FATCA (Foreign Accounts Tax Compliance Act) that became effective on July 1, 2014, caught many American expats by surprise. As such, inquires about the filing requirements for foreign financial accounts have increased.
We get many international tax questions and especially about the FBAR form 114 (FinCEN 114) and Form 8938 comparison. Although, both forms are used to report the foreign financial accounts, there are significant differences. Specifically, the types of financial accounts vary as well as the filing thresholds. Since we receive the large number of inquires, we decided to prepare the summary and clarify the differences between the FBAR form 114 and Form 8938.
FBAR Form 114 and FATCA 8938 Filing threshold
First and foremost, the forms do not substitute each other. It means that an American expat might be required to file both FBAR Form 114 and FATCA.
FBAR Form 114 must be filed with the Department of Treasury if the aggregate value of foreign financial accounts is $10,000 or more during the year. The financial account includes a bank account, investment account, mutual funds, trust accounts and other financial accounts.
American expat might be required to file Form 8938 if the total value of foreign financial accounts is more than $10,000. FATCA form 8938 is filed with an expat tax return and submitted to the IRS (Internal Revenue Service). Form 8938 also requires that all valuable assets as well as all financial accounts be listed.
The FATCA filing threshold is contingent on several criteria. The first one is whether a taxpayer is an American citizen residing in the U.S. or an American expat living abroad. The second one is whether a taxpayer is filing as an individual (single, divorced or head of household) or a joint return. The following taxpayers are required to file the FATCA form:
- Filing Individual Tax Return as a Stateside Taxpayer: Accumulative of $50K in foreign financial account balance on the last day of the year or $75k or more at any time during the year.
- Filing Joint Return as a Stateside Taxpayer Filing: Accumulative $100K in foreign financial account balance on the last day of the year or $150k or more at any time during the year.
- Filing Individual Tax Return as an American Expat Living Abroad: Accumulative balance of $200k in foreign financial accounts on the last day of the calendar year or $300K or more at any time during the calendar year.
- Filing Joint Return as an American Expat Living Abroad: Accumulative balance of $400k in foreign financial account balance on the last day of the calendar year or $600K at any time during the year.
Who Is Required to file FBAR FinCEN form 114 and FATCA 8938
FBAR Form 114 must be filed by a US person that has foreign financial accounts with an aggregate value $10K or more during the year. US persons include U.S. citizens, green card holders, U.S. residents, corporations, partnerships, or limited liability companies, created or organized in the USA or under the laws of the USA as well as trusts or estates formed under the laws of the USA. The interest in a foreign financial account includes actual financial interest and/or a signature authority. For example, an American expat who has only a signatory authority over the company’s foreign account, must file the FBAR.
FATCA form 8938 is different in this regard. For example, all foreign financial accounts that generate dividends, interest, withdrawals and other proceeds must be reported on Form 8938. If an American expat only has signature authority on a foreign financial account with no financial interest, then this account is not subject to the FATCA reporting requirements. Moreover, this account with a signature authority is not used in determining the filing threshold for FATCA purposes. Any foreign assets like investments, securities or stocks that are not held in a foreign financial institution, will be reported on form 8938 too.
Another point to note is that, although, virtually all of FATCA enforcement has the intention to find all noncompliant US citizens and green card holders, nonresidents alien accounts might be subject to the FBAR form 114 and FATCA filing too. For example, a nonresident alien who files a joint return with an American spouse, must file FBAR form 114 and FATCA 8938 if the filing threshold of account balance has been met.
US person for FATCA purposes does not include an individual born in US territories, for example, American Samoa, the Commonwealth of the Northern Mariana Islands, Guam, the Commonwealth of Puerto Rico or the US Virgin Islands.
Foreign Accounts to be listed on FBAR form 114 and FATCA form 8938
Accounts to be reported on FBAR Form 114 (FinCEN 114):
- Checking/Savings account held in a foreign domiciled bank
- Checking/Savings account held at a foreign branch of a US domiciled bank
- Foreign financial account over which a taxpayer has a signature authority
- Foreign securities or stock held in a foreign financial institution
- Foreign accounts owned by a foreign entity in which an expat has at least 50% financial interest
- Foreign mutual funds
- Foreign life insurance policy with cash value
- Foreign annuity contract
- Foreign accounts held by either a foreign or domestic trust with which an expat is associated
Accounts or items to be reported on Form 8938:
- Checking/Savings account held in a foreign domiciled bank
- Foreign mutual funds
- Foreign financial accounts held by either a foreign or domestic trust
- Foreign hedge funds
- Foreign private equity funds
- Foreign life insurance policy with cash value
- Foreign annuity contract
Which account information must be reported on FBAR Form 114 and FATCA 8938
When completing FBAR Form 114 (FinCEN 114), the highest balance of all monthly account statements is required with account details like account number, the financial institution and other account holders if they are associated with those accounts.
Form 8938 must be completed in full accurately with monthly account statements of foreign financial accounts that qualify. Fair market value assessment of foreign investment accounts must be reported. The address and type of each foreign asset must be provided along with information of any shared interest by a company or individual.
USD must be used on both forms. The exchange rate on the last day of the calendar year must be applied for accurate reporting.
What are Due Dates for FBAR FinCEN 114 Form and FATCA 8938
- FBAR Form 114 is due by April 15 (starting with a tax year 2016). FBAR deadline is still June 30 for a tax year 2015. No extension is allowed for a tax year 2015.
- Form 8938 is to be submitted with US income tax return. The extension is available for those who qualify for an extension on their US expat tax return and Form 8938.
What are Penalties for a failure to file FBAR Form 114 and FATCA form 8938
There are penalties associated with each form when one fails to comply with the requirements as indicated below.
Failure to file FBAR holds a maximum penalty of $100K or 50% of foreign assets owned by taxpayer (whichever balance is higher). Criminal charges are assessed if a taxpayer purposely disregarded to file FinCEN form 114 and to report a foreign financial account. In case of nonwillful violation, $10K penalty can be levied.
Failure to report foreign financial assets on FATCA Form 8938 will result in a penalty of $10,000 (and a penalty up to $50,000 if an expat does not file the form after IRS notification). Moreover, underpayments of tax due to nondisclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40 percent.
Conclusion
American expats must file the FBAR form 114 and FATCA 8938 by a due date to avoid penalties. If you have additional questions, please contact expat CPAs and EAs at Artio Partners.