Apr 16, 2021 FBAR & FATCA
The FBAR (Foreign Bank Account Report) is a form that the Internal Revenue Service (IRS) requires U.S. taxpayers with certain foreign bank accounts to file, wherever they may live—at home or abroad (“expatriates” or “Expats”). The FBAR is filed at the same time as (but not with) a regular personal tax return (Form 1040).
An FBAR filer can file the FBAR form – typically, FinCEN Report 114 – electronically on the Bank Secrecy Act (“BSA”) e-filing portal.
When Do I Need to File the FBAR?
A United States person, for tax purposes, who has a financial interest in or signature authority on foreign financial accounts is required by the IRS to file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.
How Do I File My Taxes as an Expatriate?
If you’re a U.S. citizen or resident alien (i.e., a U.S. person for tax purposes), the rules for filing income, estate, and gift tax returns, reporting on offshore accounts, and paying estimated tax are essentially the same no matter if you’re in the U.S. or abroad. The IRS says that your worldwide income is subject to U.S. income tax, regardless of where you live.
How Can I Get an Extension For Filing My Individual Tax Return (Form 1040)?
Yes, and it’s automatic. If you’re a U.S. citizen or resident alien who’s living overseas, or you’re in the military on duty outside the U.S., on the regular due date of your return, you’re permitted an automatic two-month extension to file your return without requesting an extension.
For a calendar year return, the automatic two-month extension is to June 15th. Note that you must pay any tax due by April 15th, or interest will be charged starting from that date. Note that although the deadline this year (2021) for individual tax returns was pushed back to May 17th, the IRS reminds U.S. citizens, resident aliens, and any domestic legal entity, that the deadline to file their annual FBAR is still April 15, 2021.
It is important to note that you cannot apply for an extension to file FBAR or FATCA forms.
Are There Penalties for Failing to File or Pay an FBAR?
Yes. The two most common types of IRS penalties are failure-to-pay and failure-to-file penalties. A failure-to-file penalty may apply if you didn’t file by the tax-filing deadline. The failure-to-pay penalty may apply if you didn’t pay all of the taxes you owed by the tax filing deadline.
- Failure to File: If you filed your return late but within 60 days of your U.S. expat return due date, the penalty will be 5% of the amount of unpaid tax. That same amount applies to each new month that the return is late. However, your FBAR penalty can’t exceed 25% of the total amount of unpaid tax. Plus, the minimum penalty for filing more than 60 days past the filing or extension date is 100% of the unpaid amount or $135 (whichever is smaller).
- Failure to Pay: If you don’t pay your taxes, you’re subject to a failure-to-pay penalty which is assessed at a monthly rate of 0.5% of your actual or perceived tax liability. Again, this can’t exceed 25% of the amount you owe. You can avoid this penalty if you request an extension and pay at least 90% of your owed taxes by the initial due date.
How Do I File Past FBAR and FATCA Forms?
If you’ve forgotten to file, or did not know that you were required to file, a tax return, or the FBAR forms, the IRS has a remedy in the form of the Streamlined Foreign or Domestic Offshore Program.
Streamlined Foreign Offshore Procedures (“SFOP”)
In addition to satisfying the general eligibility criteria, individual U.S. taxpayers, or estates of individual U.S. taxpayers, that want to use the Streamlined Foreign Offshore Procedures (“SFOP”) must also:
- Meet the applicable non-residency requirements; and
- Have failed to report the income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR for a foreign financial account, and these failures resulted from non-willful conduct.
The IRS states that non-willful conduct is conduct that is “due to negligence, inadvertence, or mistake or conduct” that’s the result of a “good faith misunderstanding of the requirements of the law.”
Individual U.S. citizens or lawful permanent residents, or estates of U.S. citizens or lawful permanent residents, must satisfy the applicable non-residency requirement if, in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the individual:
- Didn’t have a U.S. “abode”;
- The individual was physically outside the U.S. for at least 330 full days;
- You’re currently non-compliant, that is, you failed to file one or more tax returns; and
- You failed to comply with U.S. tax returns because of non-willful violation.
When you use the SFOP program, you are required to do the following:
- File the last three years of federal tax returns, if you failed to file previously. If you did file the last three years of tax returns, then file amended returns for the last three years, and file FBARs for the last six years.
- Certify that your past failure to file was non-willful; and
- Pay any taxes due.
If the IRS agrees that you meet the eligibility requirements for the SFOP program, no penalties will be imposed.
Streamlined Domestic Offshore Procedures (“SDOP”)
For US resident taxpayers, there is an IRS amnesty program – the Streamlined Domestic Offshore Procedures (“SDOP”) – where the applicant filed his original tax returns, timely, has unreported foreign income, and can certify that his non-compliance with reporting requirement was non-willful. The applicant eligible for SDOP must file amended tax returns for the last three years, file FBAR’s for the last 6 years, and pay a 5% penalty for the unreported foreign income.
In the event that the US taxpayer has no unreported foreign income, but simply failed to file the relevant information returns (e.g., FBAR-FinCEN Form 114), an IRS alternative to the Streamlined procedure may be available that may avoid any penalties. The alternative is the Delinquent International Information Return Submission Procedure (“DIIRSP”).
Delinquent International Information Return Submission Procedure (“DIIRSP”)
The DIIRSP is available to applicants who have not filed one or more international information return (e.g., Forms 8938, 3520,3520-A, 5471, FinCEN 114), are not under civil or criminal investigation by the IRS, and who the IRS has not contacted about being delinquent in their filing of any international information return. The applicant must make the case that they had a “reasonable cause” for their filing delinquency.
What is FATCA?
FATCA stands for the 2010 Foreign Account Tax Compliance Act. Congress passed this law as part of a job stimulus package, the Hiring Incentives to Restore Employment or HIRE Act.
What Are the FATCA Filing Requirements?
Federal law requires all U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts, foreign bank and securities accounts, transactions in foreign trusts, specified foreign gifts, and interests in foreign corporations. Foreign real estate isn’t a foreign financial asset required to be reported.
The FATCA forms that you may need to file include Form 8938 (specified foreign assets), Form 3520 (transactions in foreign trusts and foreign gifts), Form 3520-A (foreign trust information), or Form 5471 (interests in foreign corporations).
For illustrative purposes, we will focus on FATCA Form 8938:
On a Form 8938, you are required to report your financial accounts maintained by a foreign financial institution, which can include savings, deposit, checking, and brokerage accounts held with a bank or broker-dealer.
Unless you’re eligible for an exception, you’re required to file Form 8938 if you’re a specified person who has an interest in specified foreign financial assets and the value of those assets is more than the applicable reporting threshold.
Under FATCA, certain U.S. taxpayers holding financial assets outside the U.S. must report those assets to the IRS generally using Form 8938, Statement of Specified Foreign Financial Assets. For a single filer, the aggregate value of these assets must exceed $50,000 at any time in the tax year to be reportable, in general. However, in some instances, the threshold may be higher.
A Form 8938 must be attached to your annual tax return.
Are There Exceptions for FATCA Filing?
Yes, U.S. taxpayers who don’t have to file an income tax return for the tax year don’t have to file Form 8938, regardless of the value of their specified foreign financial assets.
Are There FATCA Penalties?
Yes. If you don’t report foreign financial assets on Form 8938, you may see a penalty of $10,000 (and a penalty up to $50,000 for continued failure after IRS notification). Plus, underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40%, and criminal penalties may also apply.
FBAR vs. FATCA?
Note that the FATCA Form 8938 requirement doesn’t replace or in any way impact a taxpayer’s obligation to file an FBAR Form FinCEN 114. You may be required to file both the FBAR and the FATCA forms, depending on your specific situation.
Ask an attorney at Ely J. Rosenzveig & Associates about the differences in the two filing requirements and how they apply to your circumstances.
Violation of the FBAR (Report of Foreign Bank Accounts) and FATCA (Foreign Assets Tax Compliance Act) reporting and record-keeping requirements can seriously impact you and your family.
The attorneys at Ely J. Rosenzveig & Associates, PC, have extensive experience navigating the complex and highly nuanced Internal Revenue Code and in dealing with the IRS, including FBARs and FATCA. Contact us today.