The reporting of foreign financial assets and accounts has become a familiar part of the federal filing process for many taxpayers. Depending on the circumstances, relevant information must be reported on the Foreign Bank and Financial Accounts Report (FBAR) and on IRS Form 8938 – Statement of Specified Foreign Financial Assets. The former is mandated by the Financial Crimes Enforcement Network (FinCEN) and is designed to provide foreign financial account details to the Department of Treasury. The latter is designed to disclose information about ownership in foreign financial assets including bank accounts, securities, and business interests. Although similar there are several important details to consider including who is required to file, when, the information which must be included, and much more. Because of this, we prepared a summary of the key points below.
FBAR Filing Requirement
This filing requires the disclosure of details about any foreign financial accounts held by the taxpayer. A financial account includes securities, brokerage, savings, checking, or deposit accounts maintained with a foreign financial institution. Other account types include commodity futures or option accounts, insurance or annuity policies with a cash value, and shares in a mutual fund. The term foreign refers to an account held in a branch anywhere not in the 50 states, Washington DC, American territories, or tribal lands. It is important to note this also includes a foreign branch of a US bank.
An FBAR filing is submitted to the FinCEN, a branch of the Treasury, and must be filed electronically and is required regardless of a taxpayer’s income tax return filing obligation. Only those with foreign accounts whose high values throughout the year sum to an excess of $10,000 are required to report. Anyone with a financial interest in or signatory authority over these accounts is required to report. This includes individuals, resident aliens, estates, trusts, partnerships, and limited liability companies (LLCs). Note: Children and disregarded entities such as single member LLCs can be required filers.
The FBAR report is due on April 15 but an automatic extension to October 15 is permitted. The penalty for a non-willful compliance is $10,000 per report (not account) and it adjusts for inflation. The maximum penalty for a willful violation is 50% of the maximum account balance throughout the year.
IRS Form 8938
A Form 8938 filing is submitted to the IRS which does not receive information or updates from FinCEN, thus the duplicative filing from the FBAR. The filing is required to disclose details about foreign financial assets with an aggregate value exceeding a statutory threshold determined by residence and filing status. For entities, those with assets that value more than $50,000 on the last day of the year or more than $75,000 at any time during the year must file. A foreign financial asset includes any financial account maintained by a foreign institution, interest in a foreign entity, financial instrument or contract issued by a non-US person and any other foreign financial assets. The term foreign refers to assets held outside the 50 states and Washington DC, including US territories (residents of a territory however do not report accounts held in their territory of residency, only accounts held in another territory). It is important to note that accounts held in foreign branches of US banks are not reportable.
Form 8938 is filed with the income tax return on April 15 and is not required if there is no income tax filing obligation. There is a penalty up to $10,000 for an initial failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of failure to disclose, for up to $50,000. If a form 8938 was omitted from an income tax return, the statute of limitations on that return does not start until the form is properly filed.
Contact Us
Due to the overlap and similarities between the two forms, it is easy to confuse these filing requirements. If you have foreign financial accounts or assets that meet the reporting threshold it is important to submit the appropriate filing. If you have questions about the information outlined above or need assistance with your international financial reporting, Belfint, Lyons & Shuman can help.
