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Government efforts to crackdown on offshore tax evasion has resulted in more paperwork and tax filings for American citizens and green card holders who maintain foreign financial accounts.
FBAR has been in place since the 1970s. It is basically a form requiring individuals to self-report financial assets held in foreign bank and foreign investment accounts. The newer FACTA (Foreign Account Tax Compliance, which went into effect in 2014, is an added level of scrutiny that requires more forms for taxpayers and also requires foreign financial institutions to report on the assets held in accounts owned by American citizens or green card holders.
Who: FBAR applies to any United States person who has a financial interest in or signature authority over foreign financial accounts if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. Additionally, it includes account holders who have an aggregate value of $10,000 across multiple accounts. For example, even if an individual has three separate foreign accounts with $4,000 each, they would still need to report all of those accounts.
Importantly, FBAR rules do not apply only to U.S. citizens. The IRS definition of a “United States Person” includes U.S. citizens (including minor children); U.S. residents (including green card holders); entities, including but not limited to, corporations, partnerships, or limited liability companies created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.
What: Anyone who meets those requirements must file an annual FinCEN Form 114 with the Financial Enforcement Network, which is a division of the IRS. These forms are filed online and are relatively simple with basic information on the name of the financial institution, account number, account holders and max value for the account during that tax year (not the year-end value). Importantly, an individual may have to file multiple forms for multiple foreign accounts, as well as accounts where they are a joint account holder or authorized signer, or another option available to some is to file a consolidated form that lists all of those different accounts.
The U.S. government has agreements with more than 100 countries that require foreign financial institutions in those countries to report directly to the U.S. about their U.S. account holders. If the FFIs do not comply, the IRS will withhold 30% of any withholders payments as a tax penalty.
– The reporting institutions include not only banks, but also other financial institutions, such as investment entities, brokers, and certain insurance companies for life insurance policies backed by annuities.
– Payees are required to provide the withholding agent with Form W-8BEN or W-8BEN-E to confirm their FATCA status. Withholding agents are required to provide statements to their account holders Form 1042-S.
– FACTA also has a similar form to the FBAR 114. IRS Form 8938 is required for individual tax filers who exceed certain asset value thresholds on their foreign accounts. Those thresholds different depending on whether you are an independent or joint married couple, and also if you are living inside or outside of the U.S. [Example: For married couples filing jointly who live in the U.S., the minimum threshold for filing Form 8938 is having more than $100,000 in foreign accounts on the last day of the tax year or more than $150,000 at any time during the tax year.]
What is included: The FBAR Form 114 includes all financial bank or investment accounts and life insurance that may be backed by a cash annuity. The FACTA Form 8938 also includes those foreign financial accounts and more, including foreign partnership interests, hedge fund and private equity funds among other investments.
When: The deadline for filing FBAR and FACTA forms are by April 15th or Oct. 15th for those filing an extension.
It is important to comply with FBAR and FACTA reporting rules, because failing to do so can result in harsh financial, or even criminal penalties in some cases. Navigating the U.S. tax environment can be challenging for even seasoned taxpayers. So, it is wise to seek guidance and advice from a trusted tax professional or financial advisor.