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OVERVIEW OF FBAR AND FATCA REPORTING REQUIREMENTS

INTRODUCTION

Over the past year, FinCen, Treasury and the Internal Revenue Service (“IRS”) have made some significant changes to the Foreign Bank and Financial Accounts (“FBAR”) reporting rules.  In addition, they have modified the new Foreign Account Tax Compliance Act (“FATCA”) reporting rules for individuals to disclose their foreign financial assets.  These changes have created much confusion for tax professionals as well as individuals and corporations who are unclear about what their reporting obligations are, and how these two reporting systems work together.  

To relieve some of this confusion, the IRS has released a statement informing taxpayers that the new FATCA filing requirements do not replace or otherwise affect a taxpayer’s obligations under FBAR. In fact, individuals are expected to file each form for which they meet the relevant reporting threshold.  Because the rules are still in transition, determining whether a taxpayer meets these requirements can be a challenge. 

OVERVIEW OF FBAR REPORTING REQUIREMENTS

Under the FBAR reporting rules a U.S. person that has a financial interest in, or has signature authority over, any foreign financial accounts must file a Form TD F 90-22.1 if the aggregate value of these accounts exceed $10,000 at any time during the calendar year.  If the threshold requirements are met, the report must be filed annually before June 30 of the year following the calendar year reported. 

There are a number of exceptions to FBAR filing requirements. For example, the rules provide an exemption from reporting certain accounts.  These include accounts of a department or agency of the United States, an Indian Tribe or any State or any political subdivision of the State or wholly owned entities of any of the foregoing; as well as accounts of an international financial institution, a military banking facility, or correspondent or nostro accounts maintained by banks and used solely for bank-to-bank settlements. 

There is also an exception for officers and employees with signature authority over, but no financial interest in a reportable account.  If an individual is an officer or employer of (1) an entity that is examined by a specified government agency; (2) a financial institution that is registered with the SEC or Commodity Futures Trading Commission; (3) an authorized service provider for an investment company registered with the SEC; (4) an entity with a class of equity securities listed on any US national securities exchange; or (4) a United States corporation that has a class of equity securities registered under section 12(g) of the SEC Act, they are not required to file a report.     

Failure to file the report may result in both civil and criminal penalties, unless the violation is due to reasonable cause.  Reasonable cause includes reliance on the advice of the tax professional that was aware the financial foreign account existed or whether the account was established for legitimate purposes and not to conceal the reporting of income or assets. 

OVERVIEW OF FATCA REPORTING REQUIREMENTS

FATCA requires certain U.S. Taxpayers holding financial assets with an aggregate value exceeding $50,000 to report certain information about those assets with their annual return.  The first obligation to report began in 2012 for those who held assets beginning after March 18, 2010.

Treasury and the IRS have provided the following asset reporting thresholds for taxpayers residing in the United States:  

  • Unmarried individuals must report values that are greater than $50,000 on the last day of the year or greater than $75,000 at any time during the year;
  • Married individuals filing jointly must report values that are greater than $100,000 on the last day of the year or greater than $150,000 at any time during the year;
  • Married individuals filing separately are the same as unmarried individuals.

For taxpayers residing outside of the U.S. and satisfying the bona fide resident or physical presence test the thresholds are a lot higher:

  • Unmarried individuals must report asset values greater than $200,000 on the last day of the year or greater than $300,000 at any time during the year;
  • Married individuals filing jointly must report asset values greater than $400,000 on the last day of the year or greater than $600,000 at any time during the year
  • Married individuals filing separate are subject to the same reporting requirements as unmarried individuals.

A penalty of $10,000, and a penalty for $50,000 for continued failure to file after receiving notification from the IRS, will be imposed on any taxpayer who cannot show reasonable cause for not reporting.

Although it is anticipated that the FATCA rules will extend to require reporting by certain domestic entities, at this point only individuals are subject to the filing requirements.

KEY DIFFERENCES AND SIMILARITIES BETWEEN FBAR AND FATCA

Below is a chart comparison, provided by the IRS, of the reporting requirements under FATCA (Form 8938) and FBAR (Form TD F 90-22.1).  The chart attempts to provide some clarity about whether a taxpayer must file, which form(s) are required to be filed, and when a taxpayer must file in order to avoid the onerous penalties that might be imposed.

 

 

Form 8938, Statement of Specified Foreign Financial Assets

Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR)

Who Must File?

Specified individuals, which include U.S citizens, resident aliens, and certain non-resident aliens that have an interest in specified foreign financial assets and meet the reporting threshold

U.S. persons, which include U.S. citizens, resident aliens, trusts, estates, and domestic entities that have an interest in foreign financial accounts and meet the reporting threshold

Does the United States include U.S. territories?

No

Yes, resident aliens of U.S territories and U.S. territory entities are subject to FBAR reporting

Reporting Threshold (Total Value of Assets)

$50,000 on the last day of the tax year or $75,000 at any time during the tax year (higher threshold amounts apply to married individuals filing jointly and individuals living abroad)

$10,000 at any time during the calendar year

When do you have an interest in an account or asset?

If any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the account or asset are or would be required to be reported, included, or otherwise reflected on your income tax return

Financial interest: you are the owner of record or holder of legal title; the owner of record or holder of legal title is your agent or representative; you have a sufficient interest in the entity that is the owner of record or holder of legal title.

Signature authority: you have authority to control the disposition of the assets in the account by direct communication with the financial institution maintaining the account.

See instructions for further details.

What is Reported?

Maximum value of specified foreign financial assets, which include financial accounts with foreign financial institutions and certain other foreign non-account investment assets

Maximum value of financial accounts maintained by a financial institution physically located in a foreign country

How are maximum account or asset values determined and reported?

Fair market value in U.S. dollars in accord with the Form 8938 instructions for each account and asset reported

Convert to U.S. dollars using the end of the taxable year exchange rate and report in U.S. dollars.

Use periodic account statements to determine the maximum value in the currency of the account.

Convert to U.S. dollars using the end of the calendar year exchange rate and report in U.S. dollars.

When Due?

By due date, including extension, if any, for income tax return

Received by June 30 (no extensions of time granted)

Where to File?

File with income tax return pursuant to instructions for filing the return

Mail to:

Department of the Treasury
Post Office Box 32621
Detroit, MI 48232-0621

For express mail to:

IRS Enterprise Computing Center
ATTN: CTR Operations
Mailroom, 4th Floor
985 Michigan Avenue
Detroit, MI 48226

Certain individuals may file electronically at BSA E-Filing System

Penalties

Up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of a failure to disclose, for a potential maximum penalty of $60,000; criminal penalties may also apply

If non-willful, up to $10,000; if willful, up to the greater of $100,000 or 50 percent of account balances; criminal penalties may also apply

Types of Foreign Assets and Whether They are Reportable

Financial (deposit and custodial) accounts held at foreign financial institutions

Yes

Yes

Financial account held at a foreign branch of a U.S. financial institution

No

Yes

Financial account held at a U.S. branch of a foreign financial institution

No

No

Foreign financial account for which you have signature authority

No, unless you otherwise have an interest in the account as described above

Yes, subject to exceptions

Foreign stock or securities held in a financial account at a foreign financial institution

The account itself is subject to reporting, but the contents of the account do not have to be separately reported

The account itself is subject to reporting, but the contents of the account do not have to be separately reported

Foreign stock or securities not held in a financial account

Yes

No

Foreign partnership interests

Yes

No

Indirect interests in foreign financial assets through an entity

No

Yes, if sufficient ownership or beneficial interest (i.e., a greater than 50 percent interest) in the entity. See instructions for further detail.

Foreign mutual funds

Yes

Yes

Domestic mutual fund investing in foreign stocks and securities

No

No

Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust for which you are the grantor

Yes, as to both foreign accounts and foreign non-account investment assets

Yes, as to foreign accounts

Foreign-issued life insurance or annuity contract with a cash-value

Yes

Yes

Foreign hedge funds and foreign private equity funds

Yes

No

Foreign real estate held directly

No

No

Foreign real estate held through a foreign entity

No, but the foreign entity itself is a specified foreign financial asset and its maximum value includes the value of the real estate

No

Foreign currency held directly

No

No

Precious Metals held directly

No

No

Personal property, held directly, such as art, antiques, jewelry, cars and other collectibles

No

No

‘Social Security’- type program benefits provided by a foreign government

No

No

 

 

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