- 1 Understanding FATCA & FBAR
- 2 FBAR vs. FATCA
- 3 Try Not To Get Overwhelmed
- 4 What is the Foreign Account Reporting Law?
- 5 Getting into Compliance with IRS Voluntary Disclosure
- 6 Basics of IRS Offshore Voluntary Disclosure
- 7 When Do I Need to Use Voluntary Disclosure?
- 8 Golding & Golding – Offshore Disclosure
- 9 The Devil is in the Details…
- 10 What if You Never Report the Money?
- 11 Getting into FBAR & FATCA Compliance
Understanding FATCA & FBAR
FBAR & FATCA are the same…but different. It is important to understand the key differences, so that when it comes time for you to file your U.S. Taxes, you have an understanding of the key differences.
FBAR vs. FATCA
FBAR (Report of Foreign Bank and Financial Accounts) has been around for nearly 50 years. It is a Form which was introduced by FinCEN and it requires Account Reporting by U.S. Persons who meet the threshold for filing. The penalties for failing to file the form can be severely brutal.
FATCA is the Foreign Account Tax Compliance Act. It is a relatively new form (2011 was the first year it was introduced) and is still undergoing a constant evolution. Form 8938 requires more extensive reporting than the FBAR, and unlike the FBAR:
- It is filed with a Tax Return
- It requires Income related information
- You cannot mark off “Balance Unknown”
- You must identify if you opened the account in the current year
- You must identify if you closed the account in the current year
- You must identify if it is a Joint Account; and
- You must identify if there was any taxes due as a result of income earned from these assets.
Moreover, FATCA Form 8938 has a broad scope in reporting (Assets vs. Accounts), although the thresholds for having to report are much higher.
Try Not To Get Overwhelmed
I know…easier said than done.
When people first learn that they are required to report their Foreign Bank Account, Retirement Account, Investment Account, or Business Account to the IRS and U.S. Government — the first thing that happens is usually a glass of wine (or two) and a night spent Google Searching (Read: Unnecessary Panic).
By the end of their midnight search, they have come to the conclusion that if it wasn’t for FATCA (Foreign Account Tax Compliance Act), they would have not reporting requirement – but this is false.
Even before FATCA, there was in IRS rule and requirement to file a report US foreign accounts called FBAR Reporting (Report of Foreign Bank and Financial Account Form)
The introduction and enforcement of FATCA is more of a Catalyst for the IRS and U.S. Government’s renewal of interest to penalize undisclosed foreign accounts.
The failure to properly file an FBAR report of FATCA Form annually may result in excessive fines and penalties – which is how the IRS and U.S. government motivates you to get into compliance. With the introduction of Customs Holds, Passport Revocations and worse, it is best to remain in compliance with U.S. Law, no matter where you reside.
What is the Foreign Account Reporting Law?
Under current U.S. Tax Laws, Rules and Regulations, there are significant reporting requirements for Individuals, Estates, and Businesses that have foreign accounts. These are individuals who generally fall into the category of being either a U.S. Citizen (accidental or not), Legal Permanent Resident (aka Green Card Holder), or Foreign National subject to US tax under the Substantial Presence Test.
If a person falls into one of these common categories (there are others) and meets certain threshold reporting requirements, then under current U.S. tax law, he or she is required to report their foreign accounts and other foreign money to the US government.
There are two main reporting requirements as follows:
If it any point during the year a U.S. Person has more than $10,000 in annual aggregate total in foreign accounts (aka accounts outside of the United States) on any day the year, they are reported to report that information annually on an FBAR. It does not matter if the person owns the money, is a joint account holder with a non-US person, or merely has signature authority over the account – they are still required to report. This form is not filed directly with your tax return, but is a separate form that is filed electronically directly to the Department of Treasury.
In addition, starting in 2011 under the new FATCA (Foreign Account Tax Compliance Act) law, individuals may also have a reporting requirement directly on their tax return with Form 8938. Unlike the FBAR, the FATCA form has different threshold requirements that vary depending on whether a person is Married Filing Jointly (MFJ), Married Filing Separate (MFS), or Single. It will also vary depending on whether a person is a U.S. Resident for Foreign Resident. In fact, the threshold requirements for reporting are much higher (aka you must have more money to report) when you reside abroad (outside of the United States).
Getting into Compliance with IRS Voluntary Disclosure
If you have unreported foreign accounts or offshore income, it is important to get into compliance. One of the fastest and most effective methods for compliance is through one of the IRS Offshore Voluntary Disclosure Programs.
When you are amending your tax returns (or completing them for the first time under the streamlined form program), you should be sure to include all the foreign taxes you paid on a foreign tax credit form 1116 to make sure you receive credit for taxes you paid abroad.
While the credit may not be a dollar-for-dollar credit (the foreign tax credit cannot be used to reduce other U.S. sourced taxed income) it will work to significantly reduce your tax liability.
Basics of IRS Offshore Voluntary Disclosure
Offshore Voluntary Disclosure Tax law is very complex. There are many aspects that go into any particular tax calculation, including the legal status, marital status, business status and residence status of the taxpayer.
When Do I Need to Use Voluntary Disclosure?
Voluntary Disclosure is for individuals, estates, and businesses who are out of compliance with the IRS and the Department of Treasury. What does that mean? It means that if you are required to file a U.S. tax return and you don’t do so timely, then you are out of compliance.
If the IRS discovers that you are out of compliance, you may become subject to extensive fines and penalties – ranging from a warning letter all the way up to tax liens, tax levies, seizures, and criminal investigations. To combat this, you can take the proactive approach and submit to Voluntary Disclosure.
Golding & Golding – Offshore Disclosure
At Golding & Golding, we limit our entire practice to offshore disclosure (IRS Voluntary Disclosure of Foreign and U.S. Assets). The term offshore disclosure is a bit of a misnomer, because the term “offshore” generally connotes visions of hiding money in secret places such as the Cayman Islands, Bahamas, Malta, or any other well-known tax haven jurisdiction – but that is not the case.
In fact, any money that is outside of the United States is considered to be offshore; the term offshore is not a bad word. In other words, merely because a person has money offshore (a.k.a. overseas or in a foreign country) does not mean that money is the result of ill-gotten gains or that the money is being “hidden.” It just means it is not in the United States. Many of our clients have assets and bank accounts in their homeland countries and these are considered offshore assets and offshore bank accounts.
The Devil is in the Details…
If you do have money offshore, then it is very important to ensure that the money has been properly reported to the U.S. government. In addition, it is also very important to ensure that if you are earning any foreign income from that offshore money, that the earnings are being reported on your U.S. tax return.
It does not matter whether your money is in a country that does not tax a particular category of income (for example, many Asian countries do not tax passive income). It also does not matter if you are a dual citizen and/or if that money has already been taxed in the foreign country.
Rather, the default position is that if you are required to file a U.S. tax return and you meet the minimum threshold requirements for filing a U.S. tax return, then you have to include all of your foreign income. If you already paid foreign tax on the income, you may qualify for a Foreign Tax Credit. In addition, if the income is earned income – as opposed to passive income – and you meet either the Bona-Fide Resident Test or Physical-Presence Test, then you may qualify for an exclusion of that income; nevertheless, the money must be included on your tax return.
What if You Never Report the Money?
If you are in the unfortunate position of having foreign money or specified foreign assets that should have been reported to the U.S. government, but which you have not reported — then you are in a bit of a predicament, which you will need to resolve before it is too late.
As we have indicated numerous times on our website, there are very unscrupulous CPAs, Attorneys, Accountants, and Tax Representatives who would like nothing more than to get you to part with all of your money by scaring you into believing you are automatically going to be arrested, jailed, or deported because you have unreported money. While that is most likely not the case (depending on the facts and circumstances of your specific situation), you may be subject to extremely high fines and penalties.
Moreover, if you knowingly or willfully hid your foreign accounts, foreign money, and offshore assets overseas, then you may become subject to even higher fines and penalties…as well as a criminal investigation by the special agents of the IRS and/or DOJ (Department of Justice).
Getting into FBAR & FATCA Compliance
There are five main methods people/businesses use to get into compliance. Four of these methods are perfectly legitimate as long as you meet the requirements for the particular mechanism of disclosure. The fifth alternative, which is called a Quiet Disclosure a.k.a. Silent Disclosure a.k.a. Soft Disclosure, is ill-advised as it is illegal and very well may result in criminal prosecution.
We are going to provide a brief summary of each program below. We have also included links to the specific programs. If you are interested, we have also prepared very popular “FAQs from the Trenches” for FBAR, OVDP and Streamlined Disclosure reporting. Unlikes the technical jargon of the IRS FAQs, our FAQs are based on the hundreds of different types of issues we have handled over the many years that we have been practicing international tax law and offshore disclosure in particular.
After reading this webpage, we hope you develop a basic understanding of each offshore disclosure alternative and how it may benefit you to get into compliance. We do not recommend attempting to disclose the information yourself as you may become subject to an IRS investigation insofar as you will have to answer questions directly to the IRS, which you can avoid with an attorney representative.
If you retain an attorney, then you will get the benefit of the attorney-client privilege which provides confidentiality between you and your representative. With a CPA, there is a relatively small privilege which does provide some comfort, but the privilege is nowhere near as strong as the confidentiality privilege you enjoy with an attorney.
Call Now; We Can Help.
Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)