FATCA, FBAR and foreign tax compliance issues: What you need to know

The enactment of FATCA has led to additional reporting requirements for foreign financial accounts.

The Internal Revenue Service (IRS) is cracking down on those who do not properly report foreign accounts. The agency is providing incentives for those who voluntarily come forward with compliance and is actively investigating foreign banks to find Americans that are not reporting their accounts. This investigation is primarily supported under the Foreign Account Tax Compliance Act, or FATCA.

More on the FATCA

The FATCA became law in 2010. This piece of legislation requires banks and other financial institutions throughout the world to report holdings by Americans that are over $50,000. A recent article in Forbes discussed the magnitude of this tax law - not only does it impact Americans, but it has a global effect as well. In addition to requiring individuals and businesses to report foreign accounts, it also requires financial institutions to report as well. Failure of a financial institution to comply could result in its being frozen out of the U.S. market.

More on reporting

Individuals are required to report certain foreign financial holdings with Form 8938. This form is returned with the individual's annual income tax return. This reporting requirement is separate from the required FinCEN Form 114, or the Report of Foreign Bank and Financial Accounts (FBAR).

Although there are many similarities between these forms, there are also some notable differences. For example:

  • Reporting threshold. The threshold for reporting on Form 8938 is $50,000 while the FBAR's threshold is only $10,000.
  • Due date. Form 8938 is due with income tax returns and the FBAR is due by June 30.
  • Qualifying accounts. There are a variety of accounts that require reporting, a full listing is available at the IRS website. Although Form 8938 and the FBAR overlap on reporting of some accounts, there are certain assets that are reportable under one form but not the other.

The FBAR predates the FATCA. FBARs are still required. The FATCA just adds additional tax burdens to these accounts.

Impact of noncompliance

Those who are not in compliance with these laws face serious criminal and civil penalties. Monetary fines for FBAR can range from $10,000 to $500,000 and FATCA can impose a penalty of 27.5 percent. Failure to report under FATCA results in an additional fine which can range from $10,000 to $50,000. In certain circumstances, criminal charges may apply.

Determining the right way to come into compliance while minimizing tax liability and any potential for criminal charges can be difficult. As a result, those who have foreign accounts are wise to seek the counsel of an experienced offshore and foreign tax compliance attorney. This legal professional will review your case and help guide you through the process, working to better ensure a more favorable outcome.

Keywords: estate planning tax planning