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Investing Overseas: FBAR Reporting 101

Posted on in Tax Rants

International investment is becoming easier and easier, so long as you have available funds. 

Advancements in technology, as well as the decreasing significance of language barriers and restrictive politics has made it possible for U.S. interests to invest overseas, even if the capital outlay is not massive. 

But the U.S. reporting rules are strict, and compliance essential.  Here’s what you need to know about reporting requirements prior to undertaking even a minimal foreign investment project. 

FBAR Reporting

In February of 2007, the Internal Revenue Service issued a news release outlining the reporting requirements for foreign financial accounts held by U.S. taxpayers under the Bank Secrecy Act of 1970 (BSA).    

The BSA requires U.S. persons having a financial interest in, or signature authority over, one or more foreign bank accounts, brokerage accounts, mutual funds, or unit trusts to report the value of and location of the accounts to the Financial Crimes Enforcement Network (FinCEN) of the Treasury Department.  Such persons are to use the Foreign Bank Account Reporting form or FBAR.  The government objective is to identify U.S. persons who may be using foreign financial accounts to facilitate tax evasion, embezzlement, drug trafficking, and terrorism, among other criminal activities. 

So long as the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year, a U.S. person who has a financial interest in or other authority over such financial accounts is required to report this information on the FBAR using the BSA online e-filing system.  

But who is considered a “U.S. person”?   What is considered a “foreign country”? 

A U.S. person is either a citizen or resident of the United States or any domestic legal entity such as a partnership, corporation, estate, or trust.  A “foreign country” includes all geographical areas outside the United States, Puerto Rico, the North Mariana Islands, and the territories and possessions of the United States including Guam, American Samoa, and the U.S. Virgin Islands. 

Though the FBAR is now required to be filed on April 15th of each year, it does not function as an income tax return and is not used to report taxable income to the IRS.  As such, sometimes overreporting is not such a bad thing.  If you are concerned about whether an account is required to be reported on the FBAR, then it may be worthwhile for you to include the account anyways as a safety measure to avoid penalties.  Consult your tax advisor before making such a decision.

What happens if you don’t file an FBAR?  In other words, if it’s not used for income tax purposes, then what is the exposure? 

If you fail to report the existence of an account on your annual FBAR, then you run the risk of being assessed a civil penalty by the Treasury Department in the range of $25,000 to $100,000 and possible criminal penalties, as well.   Pretty serious stuff. 

FATCA Reporting

In 2010, Congress added §1471 thru §1474 to the Internal Revenue Code (IRC) as part of the Foreign Account Tax Compliance Act, or FATCA. Though §1471-1474 deals with mandatory withholding provisions applicable to non-U.S. financial institutions, the FATCA provisions of this legislation also added §6038D, requiring that “specified persons” and “qualified persons” report information on “specified foreign financial assets” to the U.S. Treasury Department.

More particularly, this information must be reported on Form 8938 and must be attached to the “specified” or “qualified” person’s income tax return for each year that they held an interest in “specified foreign financial assets” whose aggregate value exceeded, on the last day of the year, (1) $50,000 for single, non-married persons living in the U.S. during the tax year or (2) $100,000 for married persons filing a joint annual return and living in the U.S. during the tax year.  

Also, if the aggregate value exceeds at any point during the year  (1) $75,000 for single, non-married persons living in the U.S. during the tax year or (2) $150,000 for married persons filing a joint annual return and living in the U.S. during the year, then the reporting requirements under §6038D are also met and the accounts must be reported on the Form 8938. 

However, if you are considered a “qualified individual,” then the end-of-year dollar thresholds quadruple to $200,000 and $400,000 for single-filers and joint-filers, respectively, and the at-any-point-during-the-year thresholds jump to $300,000 and $600,000 for single-filers and joint-filers, respectively.

OK, let’s define some terms.  What does it mean to be a “specified person” who has an interest in “specified foreign financial assets” and how is that different from a “qualified individual?” 

A “specified person” is one who is a (1) U.S. citizen, (2) resident alien of the U.S. for any portion of the tax year, (3) a nonresident alien who elects to be treated as a U.S. resident, (4) a nonresident alien who is a bona fide resident of Puerto Rico, Guam, American Samoa, the U.S. Virgin Islands, or the Northern Mariana Islands, or (4) a “specified domestic entity.” A “specified domestic entity” is either a domestic corporation, a domestic partnership, or a trust that was formed for the purposes of holding (directly or indirectly) “specified foreign financial assets.” 

Unlike a “specified person,” a “qualified individual” is one whose (1) tax home is in a foreign country and (2) who is a citizen of the U.S. and is either a resident of the foreign country or who was present in the foreign country for 330 full days within a period of 12 months.

Are there any exceptions to filing this Form 8938?

Not many.   

Specified persons are not required to report specified foreign financial assets that would result in (1) duplicative reporting of assets,  (2) reporting on certain types of trusts that are explicitly excluded from reporting, and (3) reporting of bona fide residents of a U.S. possession territory (like Guam, American Samoa, and the U.S. Virgin Islands).  

What are the penalties for not filing this Form 8938?

A failure to report this information accurately, correctly, and completely on the Form 8938 can result in a civil penalty of $10,000 assessable against the specified person and his or her spouse, if applicable, and can reach as high as $60,000 if he or she continues to not file.  Criminal and accuracy-related penalties can also be assessed.  More serious stuff.

Finally, and most importantly, the FATCA reporting requirements do not take the place of the FBAR reporting requirements: Compliance with FATCA and the filing of Form 8938 does not relieve you from complying with FinCEN and the filing the FBAR.  If your situation comes within the requirements of both laws, then you must abide by both, or you run the risk of incurring penalties for failing to do so.

If you have further questions or want some advice completing the forms, please contact us directly.  We are a qualified electronic filer and have a great deal of experience filing these forms on behalf of our clients.

 

Much gratitude to student intern Aran Quinn for his valuable research, and invaluable assistance, with this rant.

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