Differences Between FBAR and 8938 – Foreign Accounts vs. Assets
- 1 FBAR vs. FATCA
- 2 The Basics of FBAR & FATCA
- 3 A Grain of Salt…
- 4 Try to be Objective with Yourself
- 5 The Moment You Learn Your Are Out Of compliance
- 6 What Can You Do?
- 7 We Can Help
- 8 What is IRS Offshore Voluntary Disclosure?
- 9 When Do I Need to Use Voluntary Disclosure?
- 10 Golding & Golding – Offshore Disclosure
- 11 The Devil is in the Details…
- 12 What if You Never Report the Money?
- 13 Getting into Compliance
- 14 1. OVDP
- 15 2. Streamlined Domestic Offshore Disclosure
- 16 3. Streamlined Foreign Offshore Disclosure
Understanding the difference between FBAR & FATCA is very important for individuals with Offshore and Foreign Accounts or Assets.
FBAR vs. FATCA
With offshore reporting continuing to be a mainstay on the IRS’s priority enforcement, it is very important that if you maintain offshore investments or accounts that you stay in compliance with US tax law.
For most individuals, this will require the reporting of foreign investments on two main forms – FBAR and FATCA Form 8938.
While most people associate both acronyms together, they are very different.
In fact, the FBAR requirement has been in effect for nearly 50 years, while FATCA is a relatively new law that only came into effect less than three years ago.
The following is a brief summary of the difference between these two programs:
The Basics of FBAR & FATCA
On the one hand, you now have the knowledge and the wherewithal to get into compliance and avoid the IRS issuing excessive fines and penalties against you for what really seems to be minor issues.
On the flip-side, if, armed with this knowledge you decide to not take action appropriately, the IRS may decide that you have acted willfully, which can open up a Pandora’s box of IRS International Fines and Penalties.
These fines and penalties may include a 100% seizure of your foreign income, accounts, or assets – and even worse depending on the facts and circumstances of your case.
A Grain of Salt…
It is very important to understand that IRS simply does not have the capacity to go after each and every individual worldwide who may have underreported or undisclosed foreign money. In addition, if a person is found to be non-willful, the IRS penalties are significantly less — and if you get a relatively fair agent or officer at the IRS, they may simply issue you a warning letter.
The biggest problem for most individuals is the unknown:
- Will I be one of the unlucky few who is hit with willful penalties?
- Does the IRS already have my information?
- Does my foreign bank plan on reporting me under FATCA?
- Will my scorned ex-spouse or business partner go to the IRS before I have a chance to disclose?
These are all common fears and concerns we deal with regularly, but they must be considered in light of your own facts and circumstances.
Try to be Objective with Yourself
You have to try to objectively determine where you fall on the spectrum. For example, if you are a Legal Permanent Resident who has been in the United States for a few years and may have a single account in their home country that they opened when they were a child, chances are the IRS will not be kicking down your door and arresting you for this particular occurrence.
If these are your facts, then you should take a deep breath and speak with a tax attorney to determine what you can do to get into compliance.
On the other hand, if your dual citizen who operates four offshore businesses with millions of dollars in different bank accounts and layers of Hong Kong Limited companies, BVI’s, Maltese Retirement Accounts, and a Foreign Trust under your girlfriend’s name — you may have more to worry about.
If these are your facts, then you have every right to be concerned because chances are that if the IRS finds you before you have a chance to voluntarily disclose, you may be in for some serious problems – including significant fines and penalties.
The Moment You Learn Your Are Out Of compliance
The moment you learn you are out of IRS compliance regarding your foreign and offshore accounts is a defining moment.
Everything (presuming you did not have knowledge, or acted with Reckless Disregard or Willful Blindness) up until now may be considered non-willful. Therefore, if you were to get into compliance now before making any misrepresentation or omission in the future — you may qualify for the Streamlined Program or a Reasonable Cause submission. That is because even though you now have knowledge, there is nothing you could have done before you has this knowledge to change matters in the past (absent issues involving willful blindness or reckless disregard).
The problem is in moving forward, any future intentional omissions or misrepresentations to the IRS or Department of Treasury can cause a major problem in your life.
The reason is because now that you have the knowledge about what you are supposed to be filing, if you do not file as you are required to then you have acted willfully. Willful is a ‘weasel word’ developed by the IRS which has no concrete definition.
The main takeaways from the term willfulness are that you do not have to be intentional — as cases have shown you can be reckless (a much lower standard than intent) and the government can still meet the burden of showing you were willful. In addition, even though Willful FBAR penalties are criminal types of penalties, the IRS is not required to meet the burden of a criminal case for the courts to issue criminal penalties.
What Can You Do?
The first thing you should do, is to not let anyone talk you into a quiet disclosure. A Quiet Disclosure (usually recommended by unscrupulous Attorneys or CPAs) is when you secretly amend and file prior returns and/or FBARs without alerting the IRS to the fact that you are doing so.
In other words, you are trying to ‘sneak past the guard’ to avoid potentially harsh IRS fines or penalties – which is illegal. The IRS has stated if the IRS discovers you knowingly submitted a Quiet Disclosure, you are in for a world of hurt (read: Incredibly High Fines and Penalties)
Instead, you should consider your options under the different approved IRS offshore voluntary disclosure programs
We Can Help
Depending how far you may have gotten in your research, you may have learned Offshore Disclosure terms, including:
- Streamlined Filing Compliance Procedures
- Reasonable Cause
At Golding & Golding, we limit our entire international tax law practice to IRS offshore disclosure. We have assisted thousands of taxpayers in over 50 different countries with international tax related issues.
We recommend contacting various firms to get a baseline understanding of the different strategies and then take a firm that you believe represent your interests best.
At our firm, we utilized a flat fee for service model in order to best assist you. We also provide a free initial telephone consultation so that we can properly evaluate your case and determine if we are the best fit for you.
What is 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 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. Unlike 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.
Since you will be dealing with the Internal Revenue Service and they are not known to play nice or fair – it is in your best interest to obtain an experienced Offshore Disclosure Attorney.
OVDP is the Offshore Voluntary Disclosure Program — a program designed to facilitate taxpayer compliance with IRS, DOT, and DOJ International Tax Reporting and Compliance. It is generally reserved for individuals and businesses who were “Willful” (aka intentional) in their failure to comply with U.S. Government Laws and Regulations.
The Offshore Voluntary Disclosure Program is open to any US taxpayer who has offshore and foreign accounts and has not reported the financial information to the Internal Revenue Service (restrictions apply). There are some basic program requirements, with the main one being that the person/business who is applying under this amnesty program is not currently under IRS examination.
The reason is simple: OVDP is a voluntary program and if you are only entering because you are already under IRS examination, then technically, you are not voluntarily entering the program – rather, you are doing so under duress.
Any account that would have to be included on either the FBAR or 8938 form as well as additional income generating assets such as rental properties are accounts that qualify under OVDP. It should be noted that the requirements are different for the modified streamlined program, in which the taxpayer penalties are limited to only assets that are actually listed on either an FBAR or 8938 form; thus the value of a rental property would not be calculated into the penalty amount in a streamlined application, but it would be applicable in an OVDP submission.
An OVDP submission involves the failure of a taxpayer(s) to report foreign and overseas accounts such as: Foreign Bank Accounts, Foreign Financial Accounts, Foreign Retirement Accounts, Foreign Trading Accounts, Foreign Insurance, and Foreign Income, including 8938s, FBAR, Schedule B, 5741, 3520, and more.
What is Included in the Full OVDP Submission?
The full OVDP application includes:
- Eight (8) years of Amended Tax Return filings;
- Eight (8) Years of FBAR (Foreign Bank and Account Reporting Statements);
- Penalty Computation Worksheet; and
- Various OVDP specific documents in support of the application.
Under this program, the Internal Revenue Service wants to know all of the income that was generated under these accounts that were not properly reported previously. The way the taxpayer accomplishes this is by amending tax returns for eight years.
Generally, if the taxpayer has not previously reported his accounts, then there are common forms which were probably excluded from the prior year’s tax returns and include 8938 Forms, Schedule B forms, 3520 Forms, 5471 Forms, 8621 Forms, as well as proof of filing of FBARs (Foreign Bank and Financial Account Reports).
The taxpayer is required to pay the outstanding tax liability for the eight years within the disclosure period – as well as payment of interest along with another 20% penalty on that amount (for nonpayment of tax). To give you an example, let’s pick one tax year during the compliance period. If the taxpayer owed $20,000 in taxes for year 2014, then they would also have to include in the check the amount of $4,000 to cover the 20% penalty, as well as estimated interest (which is generally averaged at about 3% per year). This must be done for each year during the compliance period.
Then there is the “FBAR/8938” Penalty. The Penalty is 27.5% (or 50% if any of the foreign accounts are held at an IRS “Bad Bank”) on the highest year’s “annual aggregate total” of unreported accounts (accounts which were previously reported are not calculated into the penalty amount).
For OVDP, the annual aggregate total is determined by adding the “maximum value” of each unreported account for each year, in each of the last 8 years. To determine what the maximum value is, the taxpayer will add up the highest balances of all of their accounts for each year. In other words, for each tax year within the compliance period, the application will locate the highest balance for each account for each year, and total up the values to determine the maximum value for each year.
Thereafter, the OVDP applicant selects the highest year’s value, and multiplies it by either 27.5%, or possibly 50% if any of the money was being held in what the IRS considers to be one of the “bad banks.” When a person is completing the penalty portion of the application, the two most important things are to breathe and remember that by entering the program, the applicant is seeking to avoid criminal prosecution!
2. Streamlined Domestic Offshore Disclosure
The Streamlined Domestic Offshore Disclosure Program is a highly cost-effective method of quickly getting you into IRS (Internal Revenue Service) or DOT (Department of Treasury) compliance.
What am I supposed to Report?
There are three main reporting aspects: (1) foreign account(s), (2) certain specified assets, and (3) foreign money. While the IRS or DOJ will most likely not be kicking in your door and arresting you on the spot for failing to report, there are significantly high penalties associated with failing to comply.
In fact, the US government has the right to penalize you upwards of $10,000 per unreported account, per year for a six-year period if you are non-willful. If you are determined to be willful, the penalties can reach 100% value of the foreign accounts, including many other fines and penalties… not the least being a criminal investigation.
Reporting Specified Foreign Assets – FATCA Form 8938
Not all foreign assets must be reported. With that said, a majority of assets do have to be reported on a form 8938. For example, if you have ownership of a foreign business interest or investment such as a limited liability share of a foreign corporation, it may not need to be reported on the FBAR but may need to be disclosed on an 8938.
The reason why you may get caught in the middle of whether it must be filed or not is due largely to the reporting thresholds of the 8938. For example, while the threshold requirements for the FBAR is when the foreign accounts exceed $10,000 in annual aggregate total – and is not impacted by marital status and country of residence – the same is not true of the 8938.
The threshold requirements for filing the 8938 will depend on whether you are married filing jointly or married filing separate/single, or whether you are considered a US resident or foreign resident.
Other Forms – Foreign Business
While the FBAR and Form 8938 are the two most common forms, please keep in mind that there are many other forms that may need to be filed based on your specific facts and circumstances. For example:
- If you are the Beneficiary of a foreign trust or receive a foreign gift, you may have to file Form 3520.
- If you are the Owner of a foreign trust, you will also have to file Form 3520-A.
- If you have certain Ownerships of a foreign corporation, you have to file Form 5471.
- And (regrettably) if you fall into the unfortunate category of owning foreign mutual funds or any other Passive Foreign Investment Companies then you will have to file Form 8621 and possibly be subject to significant tax liabilities in accordance with excess distributions.
Reporting Foreign Income
If you are considered a US tax resident (which normally means you are a US citizen, Legal Permanent Resident/Green-Card Holder or Foreign National subject to US tax under the substantial presence test), then you will be taxed on your worldwide Income.
It does not matter if you earned the money in a foreign country or if it is the type of income that is not taxed in the country of origin such as interest income in Asian countries. The fact of the matter is you are required to report this information on your US tax return and pay any differential in tax that might be due.
In other words, if you earn $100,000 USD in Japan and paid 25% tax ($25,000) in Japan, you would receive a $25,000 tax credit against your foreign earnings. Thus, if your US tax liability is less than $25,000, then you will receive a carryover to use in future years against foreign income (you do not get a refund and it cannot be used against US income). If you have to pay the exact same in the United States as you did in Japan, it would equal itself out. If you would owe more money in the United States than you paid in Japan on the earnings (a.k.a. you are in a higher tax bracket), then you have to pay the difference to the U.S. Government.
3. Streamlined Foreign Offshore Disclosure
What do you do if you reside outside of the United States and recently learned that you’re out of US tax compliance, have no idea what FATCA or FBAR means, and are under the misimpression that you are going to be arrested and hauled off to jail due to irresponsible blogging by inexperienced attorneys and accountants?
If you live overseas and qualify as a foreign resident (reside outside of the United States for at least 330 days in any one of the last three tax years or do not meet the Substantial Presence Test), you may be in for a pleasant surprise.
Even though you may be completely out of US tax and reporting compliance, you may qualify for a penalty waiver and ALL of your disclosure penalties would be waived. Thus, all you will have to do besides reporting and disclosing the information is pay any outstanding tax liability and interest, if any is due. (Your foreign tax credit may offset any US taxes and you may end up with zero penalty and zero tax liability.)
*Under the Streamlined Foreign, you also have to amend or file 3 years of tax returns (and 8938s if applicable) as well as 6 years of FBAR statements just as in the Streamlined Domestic program.
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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.)