Between the tightening of existing restrictions and forming of cooperative international efforts, it is clear the IRS is stepping up efforts to increase foreign account disclosure. For US expats, this means that understanding foreign account reporting is essential.
Form 8938 vs FBAR
Form 8938 is the Statement of Specified Foreign Financial Assets and is required by the Foreign Account Tax Compliance Act (FATCA). FATCA, designed to catch money-laundering operations, increases reporting compliance by requiring both individuals holding foreign accounts and the financial institutions those accounts are held with to report their contents to the IRS. The FBAR, Form TD F 90-22.1, is also intended to identify unreported foreign generated or maintained income but is filed with the Treasury Department rather than the IRS.
Who needs to report?
Both Form 8938 and the FBAR are required for US citizens and resident aliens with an interest in foreign accounts meeting assigned thresholds. Additionally, the FBAR must be completed for trusts, estates and domestic entities that meet the reporting requirements.
Form 8938 has higher thresholds for US expats: single filers with more than $200,000 on the last day of the tax year or over $300,000 at any time during the tax year and married filing jointly taxpayers with more than $400,000 on the last day of the tax year or over $600,000 at any time during the tax year. The FBAR is necessary when the total value of assets for all accounts in foreign financial institutions exceeds $10,000 at any point during the year.
For Form 8938, the taxpayer is reporting the maximum value of foreign financial assets, including financial accounts and specified foreign non-account investment assets. In the FBAR, it is the maximum value of financial accounts maintained by a financial institution physically located in a foreign country. A specific breakdown of what types of accounts meet the requirements for Form 8938 and FBAR can be found on this IRS chart.
Among the most significant differences between Form 8938 and the FBAR involves filing deadlines and instructions. Form 8938 is filed with the taxpayer’s US expat tax return- the same deadlines and extensions apply (so, for example, if you have an extension on your US expat tax return to October 15th, you may file form 8938 also by October 15th). The IRS accepts returns by the date postmarked.
On the other hand, the FBAR is filed with the Treasury Department with a deadline of June 30th and no extensions are allowed; in addition, the form must be received by the Treasury Department by that date (not simply postmarked). As a result of FATCA, in many cases, the information reported by Form 8938 is also reported by foreign financial institutions directly to the IRS.
Depending on the specific situation, a taxpayer may need to file one or both. There are some account types that are required to be listed on both forms.
There are considerable penalties involved with both FATCA (requiring Form 8938) and the FBAR. Failing to disclose accounts via Form 8938 can result in a $10,000 fine plus an additional $10,000 for every 30 days of non-filing with a maximum penalty of $60,000. If the FBAR non-filing is determined to be non-willful, the taxpayer can be fined up to $10,000. However, if the non-compliance is found to be willful, the fine can be up to the greater of $100,000 or 50% of account balance. Failure to file in either case can result in criminal penalties. We should note that we have not seen Expats penalized in the past for failure to file if they did not know about the filing requirement.
With overlapping, but different, requirements, both Form 8938 and the FBAR can leave US expats confused or unintentionally non-compliant. It is very important to read and fully understand the instructions when filling out these forms to ensure you are accurately completing the form. They are similar, but do ask for some different information. For individuals who are behind on their tax filing or who have not previously disclosed foreign accounts, the current programs like the streamlined process and Offshore Voluntary Disclosure Program (OVDP) make now an attractive opportunity for US expats to get caught up on their taxes and or report their foreign bank accounts.