Understanding When to File Form 8938 and FBAR and Why

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FBAR vs Form 8938

FBAR vs Form 8938

FBAR vs Form 8938

When it comes to U.S. Taxpayers having to report their foreign accounts, assets, and investments to the U.S. Government, two of the most common international information reporting forms that a Taxpayer may have to file are the FBAR and Form 8938 (FATCA). Both forms require the Taxpayer to report the maximum account value at any time during the year. And, there is crossover between the two forms that may require the same accounts and assets to be reported on both forms. While the FBAR and Form 8938 are similar, the forms are not identical — thus, some assets may be required to be disclosed on one form but not the other. One common example would be stock certificates, which must be reported on form 8938 but are not required to be disclosed on the FBAR (as distinguished from stock accounts). In recent years, the Internal Revenue Service has significantly increased enforcement of foreign accounts compliance. Therefore, whenever possible it is ideal for the Taxpayer to file all the necessary forms timely and accurately to disclose all their foreign investments. For Taxpayers who are not in compliance, the Internal Revenue Service has developed various offshore tax and reporting amnesty programs to assist them in safely getting into compliance. Let’s look at some of the key differences between the FBAR and Form 8938.

5 Things to Know About FBAR

While there are many key facts about FBAR you should know, here are 5 key things to know.

FBAR has a Single Threshold

The FBAR has a single threshold whether or not the Taxpayer is filing single or joint and whether the taxpayer resides in the United States or abroad. It is required in any year that the taxpayer has more than $10,000 in annual aggregate total in all the foreign accounts combined on any day of the year.

FBAR is Not Part of the Tax Return

The FBAR is technically not an IRS form, it is a FinCEN Form. FinCEN is the Financial Crimes Enforcement Network. Taxpayers who are required to file the annual FBAR file the foreign electronically and directly on the FinCEN website. Even if a Taxpayer is not required to file a tax return in the current year for example because the taxpayer may have not earned enough income to have to file a return – they are still required to file the FBAR.

FBAR is Primarily for Accounts

The FBAR refers to foreign bank and financial accounts. The most common types of accounts that are reportable are bank accounts and investment accounts, but they include many different types of financial accounts beyond just bank accounts. For example, Taxpayers may have to report foreign life insurance policies, mutual funds and ETFs, pension plans, and sometimes even safety deposit boxes depending on who may have access to the box.

FBAR No Need for Ownership of the Accounts

Another important characteristic of the FBAR is that it does not require the file to have an interest or ownership of the foreign account. In other words, Taxpayers are required to file the FBAR even if they only have signature authority over the account and no financial interest in the account. Also, even if it is a joint account with a non-resident alien, the taxpayer who is a US person and has ownership or signatory authority of the account is still required to file the FBAR.

Penalties Vary Between willfulness and non-willfulness

The penalties for not filing a timely or accurate FBAR can be significant. The penalty for non-willfulness is based on the filing of the form and not the value of the accounts or how many accounts the taxpayer has (See Bittner). Meanwhile, willfulness penalties are based on the highest maximum value of the unreported accounts. Thus, Taxpayers who have unreported accounts with a high maximum account value may find themselves at the receiving end of a very high penalty — especially if the account was artificially high for reasons such as having sold the home and depositing the funds or possibly receiving a gift or inheritance that was deposited into the foreign accounts.

5 Things to Know About Form 8938

 Here are five things to know about Form 8938 FATCA as well.

Multiple Form 8938 Thresholds

Unlike the FBAR, there are many different threshold requirements for who has to file the annual Form 8938. The thresholds will vary, depending on whether the Taxpayer is filing a joint return, or a single/married filing a separate return — and whether or not the Taxpayer is considered a U.S. resident or foreign resident. For example, Taxpayers who are married and live overseas have a much higher threshold requirement compared to Taxpayers who are single and live in the United States.

The Form 8938 is part of the Tax Return

The Form 8938 is part of the tax return. Therefore, when the Taxpayer files their tax return they will include a copy of the Form 8938 as part of their return. Equally important is the fact that if the Taxpayer is not required to file a tax return in the current year, then they are not required to file a Form 8938 in the current year even if they otherwise meet the threshold requirement for having to file a Form 8938.

FATCA Includes ‘Non-Account’ Assets

Form 8938 requires Taxpayers to report specified foreign financial assets. While this includes items such as bank accounts and investment accounts, it also includes other types of assets such as stock certificates and foreign entities (some Taxpayers will have to file Form 5471 or 8858 instead of reporting the entity on Form 8938).

Taxpayers Must have a Financial Interest in the Assets

Unlike the FBAR, Taxpayers are only required to file a Form 8938 if they have a financial interest in the account. For example, if a Taxpayer has signatory authority over a foreign account but has no financial interest in the foreign account then they would not be required to file Form 8938 for that account.

Penalties for Form 8938

The failure to file Form 8938 may result in a $10,000 penalty, along with a continuing failure to file penalty if the Taxpayer does not file the form once they receive notice from the IRS. Also, there is no distinction as to the value of the account to determine what the penalty is but rather it is based solely on the not filing of the form.

Criminal Penalties FBAR and FATCA

Unfortunately, many less experienced attorneys have taken to fear-mongering online and scaring Taxpayers into believing that they will be subject to criminal penalties for failing to report foreign accounts and assets. While a Taxpayer may potentially be subject to criminal penalties for failing to file either of these forms it is not very likely and typically only happens in situations where there are other criminal tax violations or crimes committed such as money laundering, fraud, tax evasion, etc.

IRS Table

Form 8938, Statement of Specified Foreign Financial Assets FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR)
Who must file? Specified individuals and specified domestic entities that have an interest in specified foreign financial assets and meet the reporting threshold

  • Specified individuals include U.S citizens, resident aliens, and certain non-resident aliens
  • Specified domestic entities include certain domestic corporations, partnerships, and trusts
 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) Specified individuals living in the US:

  • Unmarried individual (or married filing separately): Total value of assets was more than $50,000 on the last day of the tax year, or more than $75,000 at any time during the year.
  • Married individual filing jointly: Total value of assets was more than $100,000 on the last day of the tax year, or more than $150,000 at any time during the year.

Specified individuals living outside the US:

  • Unmarried individual (or married filing separately): Total value of assets was more than $200,000 on the last day of the tax year, or more than $300,000 at any time during the year.
  • Married individual filing jointly: Total value of assets was more than $400,000 on the last day of the tax year, or more than $600,000 at any time during the year.

Specified domestic entities:

Total value of assets was more than $50,000 on the last day of the tax year, or more than $75,000 at any time during the tax year.

 Aggregate value of financial accounts exceeds $10,000 at any time during the calendar year. This is a cumulative balance, meaning if you have 2 accounts with a combined account balance greater than $10,000 at any one time, both accounts would have to be reported.
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? Form is attached to your annual return and due on the date of that return, including any applicable extensions Received by April 15 (6-month automatic extension to Oct 15)
Where to file? File with income tax return pursuant to instructions for filing the return.  File electronically through FinCENs BSA E-Filing System. The FBAR is not filed with a federal tax return.
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 Civil monetary penalties are adjusted annually for inflation. For civil penalty assessment prior to Aug 1, 2016, 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

Note: This table is current through the publication date. Please check the instructions for each form for information regarding any future developments.

Types of foreign assets Form 8938, Statement of Specified Foreign Financial Assets FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR)
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

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. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

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.