To counter tax fraud and tax evasion, the Internal Revenue Service (IRS) requires individuals who have money in a foreign bank account or offshore tax haven to file specific reports. Those reports include the Foreign Account Tax Compliance Act (FATCA) and the Foreign Bank Account Report (FBAR).
Acronyms can be confusing—so what are the primary similarities and differences between FATCA and FBAR reporting?
Both FATCA and FBAR reporting are driven by federal law—the Foreign Account Tax Compliance Act and the Bank Secrecy Act. Both are measures to avoid offshore tax evasion.
Understanding FATCA
FATCA requires all non-U.S. or foreign financial institutions to report accounts and monies held by U.S. persons to the IRS. In kind, FATCA also requires U.S. persons to report money in a foreign bank account to the IRS. Required reporting of U.S. persons, foreign financial, and other entities who hold their money offshore keeps both sides honest, in theory. If the system works, entities holding assets report accounts held by a U.S. taxpayer, and the taxpayer also reports money held in the institution, in separate reports.
Under FATCA, U.S. taxpayers use the Statement of Specified Foreign Financial Assets (Form 8938) to report foreign assets of generally $50,000 or more. These assets could be held in banks, through investment, insurance tools, and other mechanisms. FATCA reports are submitted with your annual federal income tax return either in April of each year or when required under an applicable extension.
FBAR Filing
FBAR requirements apply to U.S. persons, estates, trusts, and other entities that hold money or have an interest in an offshore tax or foreign bank account. An FBAR report is needed if you have assets from foreign holdings with an overall account value exceeding $10,000 at any time during the year. For example, if you have two offshore accounts whose value together reaches $11,000 during a calendar year, both accounts must be reported.
There are some exceptions to foreign accounts that are subject to the FBAR requirement, such as funds held in a U.S. military banking facility, accounts owned by government or international financial entities and others. Unlike FATCA reports, FBARs are filed through the Financial Crimes Enforcement Network (FinCen).
For both FATCA and FBAR, penalties for non-filers are serious and severe. If you have foreign accounts, claiming ignorance of regulatory reporting rules will not help you. If you are lucky, the IRS may consider your failure to file an FBAR as non-willful and levy a penalty up to $10,000. If the IRS believes you deliberately failed to file, you could see a penalty up to 50 percent of the value of the account or $100,000—whichever is greater, adjusted for inflation, of course.
Dedicated Representation with Offshore Accounts
If you have concerns or questions about reporting around foreign financial accounts, speak with our experienced offshore tax lawyers for guidance. With offices in Cleveland and Chicago, we represent clients across the United States. and internationally. Set up a consultation or call us at 440-250-9709.
To gain deeper insights into the requirements and impacts of offshore tax responsibilities, consider downloading our eBook, Offshore Tax Matters Explained. This guide offers essential information to help you navigate your financial duties, wherever you may be located globally.
