U.S. Taxation: Information Reporting – Foreign Bank and Financial Accounts
by George Gonzalez
As a U.S. citizen you are subject to taxation of worldwide income regardless of where you live. Also, regardless of your country of residence, you are subject to information reporting rules that may require you to file reports on your foreign assets and foreign activities.
This article discusses information reporting requirements that relate to foreign bank accounts and other foreign financial accounts. In separate articles in these web pages I discuss information reporting requirements related to foreign corporations and foreign trusts.
Information Reporting Premise
It is worth keeping in mind that virtually all of the various information reporting requirements have the same ultimate goal: ensuring that you include all your foreign source income in your income tax return. With many types of U.S. source income, the payor of the income reports to the IRS how much income they paid you. Examples of this are Form W-2 for employment compensation, 1099-INT for interest income, 199-DIV for dividend income, and 1099-R for pensions, annuities and other retirement benefits. With this information the IRS can compare what you report in your tax return to what should have been reported. If there is a difference, the IRS will contact you with questions or assess a tax amount different from the tax shown in your tax return.
In contrast, with foreign source income there is usually no payor that communicates to the IRS how much income they paid you. It thus becomes more difficult for the IRS to know whether you reported all your foreign source income as required by law. By requiring you to submit information reports on foreign assets and foreign activities, under the threat of potentially severe penalties for non-compliance, you are essentially obligated to fulfill a similar role to that of payors of U.S. source income. Foreign information reports submitted to the IRS alert them to watch for certain foreign source income when you file your tax return.
Information Reports on Foreign Bank and Other Financial Accounts
If you have one or more foreign bank account or foreign financial account, you may be subject to reporting requirements. There are two separate information reports related to bank and other foreign financial accounts that you should be aware of. They each have their own parameters that define their reporting obligations. Consequently, you may be required to file both reports, you may be required to file only one of them, or you may not be required to file either. It depends on whether your individual situation meets the requirements for one or both reports.
The two reports are the Report of Foreign Bank and Financial Accounts (FinCEN Form 114, informally known as the FBAR) and the Statement of Specified Foreign Financial Assets (IRS Form 8938). Although many people think of both these as IRS reports, in reality only one is filed with the IRS: Form 8938. The FinCEN Form 114 is filed with the U.S. Treasury Department (the IRS’ boss). In case you’re curious, “FinCEN” is the acronym for the Treasury Department’s Financial Crimes Enforcement Network. Nevertheless, FinCEN delegated enforcement authority to the IRS for this form, so the IRS does have a hand in this information report.
Report of Foreign Bank and Financial Accounts (FinCEN Form 114)
FinCEN Form 114 must be filed if you own, or have authority over, foreign financial accounts if
the aggregate value of those accounts exceeded $10,000 at any time during the calendar year. Any account at a foreign financial institution located outside the United States is considered a foreign financial account. A financial institution would most commonly be a bank, however, other types of financial institutions are included as well, such as securities brokerage houses, mutual fund companies, etc.
A financial account held at a U.S. branch of a foreign financial institution does not fall under the reporting requirements, as this would not be considered a foreign account. However, the reverse situation, i.e., a financial account held at a foreign branch of a U.S. financial institution, does fall under the reporting requirements for the FinCEN Form 114.
Whether the account produced taxable income during the year is not relevant. What is relevant is the balance in the account during the year. As mentioned before, both ownership and signing authority over an account is sufficient to meet the reporting requirements. If you have signing authority but no ownership in a foreign financial account the reporting rules apply just the same.
In addition to U.S. citizens and permanent residents, non-individual U.S. entities are also subject to the reporting requirements, including corporations, partnerships, limited liability companies, trusts, and estates. Thus, for example, if you own a U.S. corporation with foreign financial accounts, the corporation may be subject to the FinCEN Form 114 filing requirements.
If the aggregate value of all foreign financial accounts exceeds the reporting threshold of $10,000, and therefore the report must be filed, all foreign financial accounts must be included in the report, regardless of the balance for any single account. The information required for each account is: name on the account; account number; name and address of the foreign bank; type of account; and maximum value during the year.
FinCEN form 114 is an annual report that is due by April 15 following the calendar year being reported. As of this writing individuals who miss the deadline are allowed an automatic extension to October 15. You should always check, however, to be sure you have the most up-to-date information on filing deadlines.
The report must be filed electronically through FinCEN’s BSA E-Filing System. It is filed separately from your 1040 tax return and, as previously mentioned, it is filed with the Treasury Department, not the IRS.
It is possible to have your accountant or lawyer or someone else file the report on your behalf by signing a special form for this purpose.
Penalties for non-compliance: the Treasury Department is armed with a slew of potential penalties they can impose for failure to file a required FinCEN Form 114. The IRS has published a guide https://www.irs.gov/pub/irs-pdf/p5569.pdf that explains the various penalties, grouping the penalties into these categories: Pattern of Negligent Activity; Non-Willful Violation; and Willful Violation.
Among the penalties listed in the IRS’ guide are criminal penalties for “Knowingly and Willfully Filing False FBAR: Up to $10,000 or 5 years or both” and “Failure to File FBAR or Retain Required Records: Up to $250,000 or 5 years or both” and “If violating certain other laws too, this penalty increases to up to $500,000 or 10 years or both.” Obviously, the penalties can be quite severe, thus you want to ensure that you comply with the FinCEN Form 114 filing requirements.
Statement of Specified Foreign Financial Assets (IRS Form 8938)
The Statement of Specified Foreign Financial Assets (IRS Form 8938) must be filed if you own, or have authority over, “specified foreign financial assets” if the aggregate value of those accounts exceeded certain thresholds during the calendar year and you had right to some kind of income from the account that must be reported in your income tax return.
While the reporting threshold for the FinCEN Form 114 is straightforward ($10,000), the thresholds for the Form 8938 are multi-tiered. Those thresholds depend on whether (1) you live in the U.S. or outside the U.S. and (2) your filing status. Here are the thresholds:
- Individuals who live in the U.S.:
- For unmarried individuals and individuals who file under the married filing separately status: the total value of assets was more than $50,000 on the last day of the tax year, or more than $75,000 at any time during the year.
- For married individuals filing jointly: the total value of assets was more than $100,000 on the last day of the tax year, or more than $150,000 at any time during the year.
- Individuals who live outside the U.S.:
- For unmarried individuals and individuals who file under the married filing separately status: the total value of assets was more than $200,000 on the last day of the tax year, or more than $300,000 at any time during the year.
- For married individuals filing jointly: the total value of assets was more than $400,000 on the last day of the tax year, or more than $600,000 at any time during the year.
Domestic entities, i.e., domestic corporations, partnerships, and trusts, are subject to the same thresholds above for unmarried individuals and individuals who file under the married filing separately status.
Some but not all types of foreign financial accounts that are subject to the FinCEN Form 114 reporting requirements are also subject to the Form 8938 reporting requirements, and vice versa.
The types of foreign financial accounts for which you would be subject to FinCEN Form 114 reporting requirements but not Form 8938 reporting requirements are:
- A financial account held at a foreign branch of a U.S. financial institution.
- A foreign financial account for which you have signature authority but no right to any kind of income that must be reported on your income tax return.
- An indirect interest in foreign financial assets through an entity (this would be reportable in the FinCEN Form 114 if you had a greater than 50 percent interest in the entity).
The types of foreign financial assets for which you would be subject to Form 8938 reporting requirements but not FinCEN Form 114 reporting requirements are:
- Foreign stock or securities not held in a financial account.
- Foreign partnership interests.
- Foreign-issued life insurance or annuity contract with a cash-value.
- Foreign hedge funds and foreign private equity funds.
This IRS web page has a helpful comparison table for FinCEN Form 114 versus IRS Form 8938 reporting requirements: https://www.irs.gov/businesses/comparison-of-form-8938-and-fbar-requirements.
Form 8938 is an attachment to your annual 1040 tax return and, accordingly, is due at the same time that your 1040 is due (including extensions).
Penalties for non-compliance: like the FinCEN Form 114, there are categories of penalties for failing to comply with the Form 8938 filing requirements.
- If you are required to file Form 8938 but do not file a complete and correct Form 8938 by the due date (including extensions), you may be subject to a failure-to-file penalty of $10,000.
- If you do not file a correct and complete Form 8938 within 90 days after the IRS mails you a notice of the failure to file, you may be subject to a continuing-failure-to-file penalty, which is an additional penalty of $10,000 for each 30-day period (or part of a period) during which you continue to fail to file Form 8938 after the 90-day period has expired. The maximum additional penalty for a continuing failure to file Form 8938 is $50,000.