The Exceptions to Reporting Foreign Accounts Explained 2024

Exceptions to Reporting Foreign Accounts

Exceptions to Reporting Foreign Accounts

When it comes to international information reporting, the IRS has very strict requirements for US Persons with foreign bank accounts located overseas. There are many different reporting forms a US Person may be required to file, including the FBAR (FinCEN Form 114); Form 8938 (FATCA), and Form 8621 (PFIC). While there are several other disclosure forms, such as Form 5471 (Foreign Corporations) and Form 8865 (Foreign Partnerships) — the Foreign Account Reporting requirements are generally the most encompassing — and most common for Taxpayers with overseas investments.

Let’s review the (few) common exceptions to reporting:

FBAR Exceptions

According to FinCEN, the following types of foreign financial accounts are excepted from the FBAR filing requirement:

• • • Certain Accounts Jointly Owned by Spouses. The spouse of an individual who files an FBAR is not required to file a separate FBAR if certain conditions are met as previously discussed; refer to “Reporting Jointly Held Accounts.”

    • Correspondent/Nostro Account. Correspondent or nostro accounts (maintained by banks and used solely for bank-to-bank settlements) are not required to be reported.

    • Governmental Entity. A foreign financial account of any governmental entity is not required to be reported by any person.

      • • Example: A government employee retirement or welfare benefit plan is not required to file an FBAR because it is a governmental entity. 

        • Example: A state administered college or university is not required to file an FBAR because it is a governmental entity.

    • International Financial Institution. A foreign financial account of any international financial institution (if the United States government is a member) is not required to be reported by any person.

      • • Examples are the World Bank and the International Monetary Fund (IMF).

        • United States Military Banking Facility. A financial account maintained with a financial institution located on a United States military installation is not required to be reported, even if that military installation is outside of the United States.

Form 8938 Exceptions

As provided by the IRS:

Exceptions To Reporting

• • • Duplicative Reporting You do not have to report any asset on Form 8938 if you report it on one or more of the following forms that you timely file with the IRS for the same tax year.

      • Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.

      • Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations.

      • Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.

      • Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. Instead, you must identify on Form 8938 the form(s) on which you report the specified foreign financial asset and how many of these forms you file. See Part IV. Excepted Specified Foreign Financial Assets, later.

Joint Form 5471 or Form 8865 Filers

• • • If you are included as part of a joint Form 5471 or Form 8865 filing and provide the notification required by Regulations section 1.6038-2(i) or 1.6038-3(c), you are considered to have filed that form for purposes of the requirement to report specified foreign financial assets on Form 8938. See Part IV. Excepted Specified Foreign Financial Assets, later.

Foreign Grantor Trusts

• • • If you are considered the owner under the grantor trust rules of any part of a foreign trust, you do not have to report any of the specified foreign financial assets held by the part of the trust you are considered to own if you satisfy the following conditions.

      • You report the trust on a Form 3520 that you timely file with the IRS for the same tax year.

      • The trust timely files Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner, with the IRS for the same tax year. Instead, you must identify on Form 8938 how many of these forms you file. See Part IV. Excepted Specified Foreign Financial Assets, later.

      • If you are a specified individual, you must include the value of the assets reported on Forms 3520, 3520-A, 5471, 8621, and 8865 in determining whether you satisfy the reporting threshold that applies to you. See Reporting Thresholds Applying to Specified Individuals, earlier.

Domestic Investment Trusts

• • • If you are considered the owner under the grantor trust rules of any part of a domestic widely held fixed investment trust under Regulations section 1.671-5, you do not have to report any specified foreign financial asset held by the part of the trust you are considered to own.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.