Tax Quarry

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.