FATCA, FBAR, and International Tax Liabilities
FATCA is a law, and FBAR is a report you must make. If you have significant assets, accounts, or money in foreign financial institutions, you should be familiar with both:
FATCA (Foreign Account Tax Compliance Act)
FATCA is the law that enables the IRA to keep tabs on U.S. account holders overseas. Foreign financial Institutions (FFIs) in countries that are under treaty with the U.S. FFIs send a yearly report to the IRS listing U.S. persons who own or have a substantial financial interest in those countries.
FFIs also withhold and pay the IRS 30 percent of proceeds from U.S. account holders who:
- hide the identities of their owners and stockholders
- conceal owners’ nationalities
- earn profits from non-participating FFIs
Sanctions Are Hefty
Under FATCA, U.S. persons must report foreign financial assets on Form 8938. Failure to do so can result in a penalty of $10,000, with an additional $50,000 for failure to comply after an IRS notice. Also, underpayments on taxable assets overseas are subject to an “understatement penalty” of 40 percent.
FBAR (Foreign Bank and Financial Accounts Report)
If you have a foreign bank or financial account overseas and its aggregate value exceeds $10,000, you must file an FBAR on FinCEN Form 114. The Form is available only online through the BSA E-Filing system.
The government uses the FBAR as a tool to:
- identify persons who may be using foreign accounts to circumvent U.S. law
- trace funds used for illicit purposes
- uncover unreported income maintained or generated abroad
You must file an FBAR if you are a United States Person who has signature authority or financial interest in a foreign-held account. The account must also exceed $10,000 at any time during the calendar year.
Exceptions from FBAR filing include:
- IRA owners whose accounts are maintained abroad
- owners, participants, or beneficiaries of tax-qualified retirement plans with assets overseas
- anyone who has signature authority, but no financial interest in, a foreign financial account under certain situations; e.g. bank employees or officers
Penalties for not filing the FBAR
Penalties fall into a matrix of intent (negligent to willful), civil penalties (fines, etc.), and criminal sanctions. Willful failure to file FBAR or to retain records of account at the time of the violation could result in a criminal penalty of up to a $500,000 fine, or 10 years in prison, or both.
We have briefly outlined both FATCA and FBAR above. For a complete summary of FATCA reporting for U.S. taxpayers, visit the IRS web page linked here.
If all that reading material gets a bit overwhelming, a Dukhon Tax international tax advisor will gladly help you sort it out and keep you on the straight and narrow with the IRS.
We also specialize in helping you maximize foreign tax credits and strategies for foreign tax reduction so you can keep more of what you earn.
Please contact Dukhon Tax for a free consultation and tell us how we can help.