FBAR AND FATCA Filing and Disclosure Requirements
FinCEN 114 (FBAR)(f/k/a TD F 90-22.1)
IRS Form 8938, Statement of Foreign Financial Assets
IRS Form 3520, Annual Return to Report Transactions with Foreign Trusts
IRS Form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner
IRS Form 5471, Information Return of U.S. Persons with Respect to Foreign Corp.
IRS Form 8621, Information Return by a Shareholder of a PFIC or Qualified Electing Fund
IRS Form 8865, Return of U.S. Persons with Respect to a Foreign Partnership
FBAR AND FATCA Filing and Disclosure Requirements on Foreign Bank Accounts and Specified Foreign Financial Assets and Other Foreign Reporting
FinCEN 114 (FBAR) —This is the form that focuses in on U.S. taxpayers with foreign financial accounts (bank accounts, securities accounts and other similar accounts), in tandem with the question appearing on IRS Form 1040, Schedule B, Part III (or incident to returns filed by U.S. entities, estates and tax-exempts). Any U.S. Person with a financial interest in, or signature or other authority over, the foreign financial account where the aggregate account balance of all such foreign accounts exceed $10,000 in U.S. dollars at any time during the year must file this form, unless they show that they are exempt from such filing. Having a financial interest includes when that account is held by another as an agent, nominee or attorney on behalf of the U.S. Person, or accounts held by a corporation in which the U.S. Person owns more than 50% of the voting power or total value of the shares, or a partnership in which the U.S. Person owns directly or indirectly more than a 50% of the interest in profits or capital. Also, when the accounts are held by any other entity in which the U.S. Person owns directly or indirectly more than 50% of the voting power, total value of the equity interests or assets, or interest in profits. Also accounts held by a trust, if the U.S. Person is the trust grantor and has an ownership interest in the trust for U.S. tax purposes, or in which the U.S. Person has either a present beneficial interest in more than 50% of the assets or from which such person receives more than 50% of the current income. “Signature authority” is broadly defined and focuses in on those who control alone or with others the disposition of money, funds or other assets held in the foreign financial account by direct communication to those with whom the financial account is maintained. The form was formerly known as TD F 90-22.1, which is now obsolete. It is required to be filed annually, by June 30, and is filed electronically. No extensions are available. Form 114a is the form that can used to file on behalf of a client. Those who file must register with BSA to access online filing system, at http://bsaefiling.fincen.treas.gov/Enroll.html. The FBAR Penalties for non-compliance are severe, with criminal penalties for willful violations of up to 5 years imprisonment and a $250,000 fine, and civil penalties for willful violations equal to the greater of $100,000 or 50% of the balance in the account at the time of violation. Even for non-willful violations, the civil penalty is up to $10,000 for each violation. Both penalties of a criminal and civil nature can apply.
IRS Form 8938, Statement of Foreign Financial Assets—This is a new form that arises out of the Foreign Account Tax Compliance Act (“FATCA”) enacted in 2011. Under FATCA, two separate filing requirements emerged:
(1) foreign financial and other institutions (called “FFI’s”) to report directly to the United States Government information about financial accounts held by U.S. taxpayers (or held by foreign entities in which U.S. taxpayers hold a substantial interest); and
(2) U.S. taxpayers to fully disclose all of their interests in foreign financial assets that exceed certain thresholds, using IRS Form 8938.
By “registered,” this means that the FFI’s have agreed to report to the IRS here in the United States information about financial accounts held by U.S. taxpayers (or by foreign entities in which U.S. taxpayers hold a substantial interest). Over 100 countries have “signed up” with the United States, agreeing to comply with FATCA. The countries include Bermuda, Canada, Cayman Islands, Chile, Costa Rica, Denmark, Finland, France, Germany, Guernsey, Honduras, Hungary, Ireland, Isle of Man, Italy, Japan, Jersey, Luxembourg, Malta, Mauritas, Mexico, Netherlands, Norway, Spain, Switzerland, and United Kingdom. Also, well over 100,000 “foreign” financial institutions have already registered with the IRS to be FATCA-compliant.
As to the filing of IRS Form 8938, the focus is on U.S. taxpayers who have “specified foreign financial assets” (“SFFA”), which is a term that is very broadly construed, and a reporting obligation arises when the value of those SFFAs exceed certain thresholds. By this term SFFA, the IRS is looking at not only bank accounts maintained by FFIs, but also other foreign financial assets held for investment, including:
- ? Foreign stocks and securities;
- Foreign mutual funds;
- Foreign hedge funds;
- Foreign private equity funds;
- Certain foreign insurance products (with cash value);
- Interests in a foreign entity (company or partnership, etc.);
- Financial instruments or contracts with any non-US issuer;
- Foreign pensions;
- Foreign deferred compensation plans;
- Certain foreign trusts and estates.
The reporting thresholds for domestic taxpayers are different than for those who are deemed to be “living abroad.” There are rules to avoid duplicative filings or reportings, when it comes to specified foreign financial assets already required to be reported on IRS Form 3520, Forms 3520-A, Form 5471, Form 8621, Form 8865, or Form 8891.
For those who are delinquent, there is exists an expanded streamlined filing compliance program for non-willful taxpayers who have been U.S. residents for the past 3 years and have filed their U.S. income tax returns during such time, a streamlined foreign offshore procedures for those who have been living abroad (as defined by such procedures). For “willful” taxpayers who are non-compliant, there does exist an offshore voluntary disclosure program, where the penalty can be between 27.5 and 50%, and there is a 8-year look back period. There is also a separate program for those who have reported all of their income but are simply delinquent in their FBAR submissions.
In the Tax Consultation practice area at the Tufts Law Firm, we provided tax consultation with persons who are concerned about their filings obligations that arise out of having foreign bank accounts or foreign assets.
The penalties for the non-filing of Form 8938 are up to $10,000 in civil penalties and an additional $10,000 continuation penalty for each 30-day period after the taxpayer is notified by the IRS of the failure to file (not to exceed $50,000), though there is an exception for reasonable cause not due to willful neglect. Criminal penalties could apply.
The failure to file a proper Form 8938 may result in the keeping of the statute of limitations open for ALL items on a return until 3 years after Form 8938 is filed.
If you wish to consult with us about these foreign reporting requirements, or if you have questions about FinCEN 114, or Form 8938, or other foreign reporting information issues, including if you have an interest in applying for the voluntary disclosure programs, or the streamlined procedures, please contact us.