The Foreign Account Tax Compliance Act (FATCA) will take effect from 2014 and require Foreign Financial Institutions (FFIs) to disclose tax-relevant information about persons and legal entities with a US tax liability to the US Internal Revenue Service (IRS) or risk being penalized. Beginning in 2014, these penalties include a 30% ‘withholding tax’ on any income gained by an FFI and its customers from US sources and may well come to include additional sanctions or financial penalties in the future.
These are the two forms that taxpayers who have foreign financial accounts or assets may have to submit. The FBAR has been around for many years as Form TD F 90.22.1 but has been replaced by FinCen Report 114 as of tax year 2013. It is submitted separately from the tax return.
Form 8938 has been in existence since tax year 2011, as part of the new FATCA legislation and is included in the tax return.
FinCEN Form 114: Report of Foreign Bank and Financial Accounts (FBAR)
Filing Requirements: U.S. citizens, U.S. residents, trusts, estates, and domestic entities that have a financial interest in or signature authority over foreign financial accounts; and the aggregate value of the foreign accounts exceeds $10,000 at any time during the calendar year.
Financial interest: (1) you are the owner of record or holder of legal title or the owner of record; or (2) holder of legal title is your agent or representative; or (3) you have a sufficient interest in the entity that is the owner of record or holder of legal title.
Signature authority: you have authority to control the disposition of the assets in the account by direct communication with the financial institution maintaining the account.
If you have child with over $10,000 in foreign accounts, a separate FBAR will be required for your child even if you declare the account on your FBAR as custodian.
Form 114 is separate from the tax return and can only be electronically filed. It is due April 15 of each calendar year. If you and spouse own separate foreign accounts, you will each be required to file an FBAR. The value of any jointly owned accounts will be the entire value of the account on each spouse’s FBAR. Form 114 Instructions.
Penalties for Failure to File FBAR
Civil penalties for a non-willful failure to file an FBAR are not to exceed $10,000 per violation. However, each unreported account is considered one violation. Therefore, a taxpayer who has four financial accounts could be penalized $40,000 for each year in which an FBAR form was not filed.
A taxpayer that willfully fails to file an FBAR can be assessed a civil penalty equal to the greater of $100,000 or 50% of the unreported account balance at the time of the violation. Additionally, a willful failure to file may be subject criminal penalties, including monetary fines, restitution, and incarceration.
Form 8938: Statement of Specified Foreign Financial Assets
Filing Requirements: U.S citizens, U.S. residents, and certain non-resident aliens that have an interest in specified foreign financial assets; and you meet the threshold reporting requirements below to file a tax return. Form 8938 Instructions.
Living in the United States
Living outside the United States
|Single or married filing separately
$50,000 on 12/31/19 or $75,000 at any time during 2019
|Single or married filing separately
$200,000 on 12/31/19 or $300,000 at any time during 2019
|Married filing jointly
$100,000 on 12/31/9 0r $150,000 at any time during 2019
|Married filing jointly
$400,000 on 12/31/19 or $600,000 at any time during 2019
Where to file: Form 8938 is included with the federal tax return and is only required if you meet the threshold and a tax return is required to be filed.
Value to Report of Jointly Owned Assets for Form 8938:
- If you file a joint tax return, you must include the total value of all assets owned by you and spouse.
- If you jointly own assets with a spouse and you each file a U.S. tax return as married-separate, then the value of your jointly owned assets is one-half each.
- If you jointly own assets with a spouse who is non-resident (not required to file) and you file as married-separate or head of household, for reporting requirements, your value of the jointly owned assets is the total value of the assets.
- If you jointly own assets with a non-spouse, for reporting requirements, your value of the jointly owned assets is the total value of the assets.
Reportable Accounts & Assets on Form 8938
Foreign accounts and assets include, but are not limited to, the following accounts open at some point in after 2014.
- Financial (deposit and custodial) accounts held at foreign financial institutions. This includes but is not limited to savings, checking, time deposits, and demand accounts. (FBAR & Form 8938).
- Shares in a mutual fund or similar pooled fund that is available to the general public. (FBAR & Form 8938).
- Foreign stock or securities held in a financial account at a foreign financial institution. This includes securities and brokerage accounts (including futures and options accounts). The account itself is subject to reporting, but the contents of the account do not have to be separately reported. (FBAR & Form 8938).
- Foreign accounts held by foreign or domestic grantor trust for which you are the grantor. (FBAR & Form 8938).
- Foreign-issued life insurance or annuity contract with a cash-value. (FBAR & Form 8938).
- An interest in a foreign retirement plan or deferred compensation plan. (If you require Form 8938, this will be listed as an asset). (FBAR & Form 8938).
- Financial account held at a foreign branch of a U.S. financial institution. (FBAR only).
- Foreign financial account for which you have signature authority (subject to exceptions). (FBAR only).
- Indirect interests in foreign financial assets through an entity if sufficient ownership or beneficial interest (i.e., a greater than 50 percent interest) in the entity. (FBAR only).
- Foreign non-account investment assets held by foreign or domestic grantor trust for which you are the grantor
- Foreign partnership interests
- Foreign stock or securities not held in a financial account (issued by a corporation).
- Foreign hedge funds and foreign private equity funds
- A note, bond or debenture issued by a foreign person.
- An interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap or similar agreement with a foreign counter party.
- An option or other derivative instrument with respect to any of these examples or with respect to any currency or commodity that is entered into with a foreign counter party or issuer.
- An interest in a foreign estate.
Potential Penalties for Failure to File Form 8938
A civil penalty of $10,000 may be assessed for failure to timely file a complete and correct Form 8938. There is also a continued failure to file penalty of $10,000 for each thirty day period or fraction thereof until Form 8938 is filed. The continued failure to file penalty commences 90 days from the form’s original due date. The maximum penalty for failure to file Form 8938 is $50,000 per year.
Exceptions to Reporting on Form 8938:
You do not have to report any asset on Form 8938 if you report it on one or more of the following forms that you timely file with the IRS for the same tax year.
- Form 3520, Form 3520 involves perhaps the most complex information reporting of all the information returns. In brief, owners of foreign trusts must report on Form 3520 whether or not there are specific transactions during the tax year. Certain transactions between a foreign trust and a U.S. person need to be reported on Form 3520, and the trust itself may be required to file Form 3520-A.
As many foreign retirement savings plans are deemed to be custodial “grantor trusts,” this means that the plan (or its owner) may be required to file Form 3520A and contributions to the plan may be required to be reported by the person making the contribution on Form 3520. In addition, many taxpayers set up trusts as local planning tools and need to file Form 3520 as a result. Also required to be reported on Form 3520 is the receipt of certain large gifts or bequests (more than $100,000) from a NRA or foreign estate to a U.S. person. The threshold amount is significantly lower for a gift from a foreign corporation or a foreign partnership (more than $16,111 in 2018).
- Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations. If you own stock in a CDC you must file form 5471. The definition of CDC is a foreign owned corporation for which you hold 10% of the total shares available to stockholders or you have control over at least 10% of the corporation’s voting rights. If you have sizable investments in bars, restaurants, or any other public establishment, you may also need to file Form 5471.
- Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund. Form 8621, Passive Foreign Investment Company, is a form which – as its name suggests – has to do with passive foreign investments, such as an offshore investment plan, a foreign-domiciled mutual fund, or a tax-deferred fund in a foreign country. You will be required to file Form 8621 any year which you receive distribution.
- Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. Are you involved in a foreign partnership with 5 or less stateside partners? If so, you may need to file Form 8865. If you and your group of US partners hold at least 50% of the total partnership and each hold at least 10% interest, you will be required to report all income and transactions between yourself and the partnership.
- Form 8891, U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans.
Non-Reportable Foreign Assets on Form 8938:
- Financial account held at a U.S. branch of a foreign financial institution
- Foreign real estate held directly (includes your personal residence and your rental properties)
- Foreign real estate held through a foreign entity. However, for Form 8938, the foreign entity itself is a specified foreign financial asset and its maximum value includes the value of the real estate
- Domestic mutual fund investing in foreign stocks and securities
- Foreign currency held directly
- Precious Metals held directly
- Personal property, held directly, such as art, antiques, jewelry, cars and other collectibles
- Social security, social insurance, or other similar program of a foreign government.
Note : The FBAR and Form 8938 use year-end exchange rates (12/31) whereas for income and expenses for foreign income calculation, use the average exchange rate. These rates can be found at Treasury Reporting Rates of Exchange (US Bureau of the Treasury Department).
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