Understanding Why Expats File FATCA and FBAR (New 2024)

Understand How FATCA and FBAR Work for U.S. Expats

How FATCA and FBAR Work for U.S. Expats

Two of the most common acronyms in the world of international tax are FATCA (Foreign Account Tax Compliance Act) and FBAR (Foreign Bank and Financial Account Reporting). Both of these forms require taxpayers with foreign accounts, assets, and investments to report them to the IRS and FinCEN. While U.S. Expats technically may reside outside of the United States for the majority of the year, they are still required to file annual Tax Returns as well as report their foreign accounts/assets. While there are many differences and distinctions between FATCA and FBAR, let’s review some of the basics.

Where is FBAR Filed?

While Taxpayers may be required to file many different types of international information reporting forms each year in order to report their foreign accounts, assets, investments, and income — the FBAR (FinCEN Form 114) is the most common and well-known international reporting form. That is because unlike many of the other international reporting forms, the FBAR is not limited to one specific type of asset. For example, when taxpayers report foreign corporations, they will file Form 5471. If they have to report a foreign trust then they will file Form 3520-A, but the FBAR is more general (and more encompassing) than these other forms. It is used to report all different types of foreign financial accounts, such as bank accounts, investment accounts, foreign pension plans, certain life insurance policies, pooled funds (Mutual Funds and ETFs), and more. Let’s go through the most important facts about FBAR filing and reporting in order to help avoid some common mistakes.

The FBAR is Not a Tax Form

The first thing to remember about the FBAR is that it is not an IRS tax form. Technically it is a FinCEN (Financial Crimes Enforcement Network) form. The reason why this is important is that you will not find the FBAR form with your tax preparation documents. Rather, the form is located on the FinCEN website and Taxpayers should download the form from the FinCEN site, complete the form, and then submit it electronically on the FinCEN website as well.

FBAR is not Limited to Bank Accounts

The FBAR is not limited to just bank accounts (although bank accounts are the most common type of reportable asset). Rather, it includes many different types of foreign financial accounts, such as investment accounts, stock accounts, life insurance policies, and pension plans.

The Threshold is Not $10,000+ Per Account

Each account that is reported on the FBAR does not have to contain more than $10,000. Rather, it is a +$10,000 annual aggregate total of all of the accounts. Therefore, if a Taxpayer had one account with $300,000 and 17 different accounts with under $50 in each of them, the Taxpayer would report all 18 accounts.

FATCA and FBAR are Not the Same Things

FBAR refers to foreign bank and financial account reporting. FATCA refers to the Foreign Account Tax Compliance Act. FATCA has been a filing requirement for taxpayers since 2012 (on the 2011 tax return) and is similar to FBAR (at least for reporting purposes) — but FBAR and FATCA are not the same thing. Depending on the type of accounts or assets that a person has, they may be required to file both forms, and some assets may be listed on both forms as well.

Required for Taxpayers Residing Overseas

One of the first misconceptions about filing for FATCA is that it is only required for US citizens or US taxpayers who reside in the United States — but that is incorrect. Anybody who is considered a US person may be required to file a Form 8938  (if they meet the threshold) and report under FATCA, whether or not they reside in the United States or outside in a different country.

Not the Same as FBAR – International Law

The FBAR (Foreign Bank and Financial Account Reporting) is a similar type of international reporting form but different than FATCA. FBAR is a US law that is developed for US persons to comply with the IRS’ international reporting rules. The FBAR is a FinCEN Form (FinCEN Form 114) and not an IRS form. It is regulated differently than the Form 8938/FATCA. The FBAR is regulated under Title 31 (Money and Finance) and not Title 26 (Internal Revenue Code). While there are some assets that overlap and are required to be disclosed on both forms, there are also some items that are only reportable on Form 8938 in order to comply with FATCA — such as individually held shares of stock. Some taxpayers may have to report both the FBAR as well as report under FATCA in the same year.

Increase in Soft Letters 6185 & 6291

In the past 6-9 months, there has been a surge in the number of taxpayers who have received soft letters involving inaccurate information the IRS has on file for Taxpayers involving FATCA. In a common scenario, the Foreign Financial Institution reports one set of values and the US taxpayer either does not report or reports a completely different set of values. 

Initial Penalty and Continuing Penalty

In comparison to the FBAR and other penalties, at first glance, the FATCA noncompliance penalty for individuals filing Form 8938 does not seem so bad compared to what you may read about on the Internet — a $10,000 penalty. But, there is also a continuing penalty of upwards of $50,000 for a continuing Failure to File Form 8938 each year. In addition, the US government has been beginning to use FATCA noncompliance as a criminal tool — and about a year ago, obtained its first criminal conviction for FATCA noncompliance.

Limitations on Reasonable Cause

As with most penalties, when a Taxpayer does not comply with FATCA, they may be able to minimize or abate penalties if they can show that they acted with a Reasonable Cause and not willful neglect. It is important to note that there are very specific limitations on Reasonable Cause when it comes to taxpayers who are non-compliant with FATCA. As provided by the IRS:

• “Effect of foreign jurisdiction laws. The fact that a foreign jurisdiction would impose a civil or criminal penalty on you if you disclose the required information is not reasonable cause.”

Thus, taxpayers are required to disclose FATCA assets, even if it would violate their own country’s laws. And, the fear of violating a person’s own country’s laws is not a sufficient reason to show Reasonable Cause in being non-compliant.

FATCA Enforcement is on the Rise

In conclusion, the Foreign Account Tax Compliance Act is just one of the latest types of international enforcement tools developed by the Internal Revenue Service in order to ensure compliance with international reporting rules. If a taxpayer is out of compliance for not reporting under FATCA, they may still qualify for one of the voluntary disclosure programs in order to get themselves into compliance.

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.