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If you have financial assets outside the U.S., such as foreign bank accounts, investment accounts, or other direct investments, you may have annual reporting requirements.
There are two primary reports required to report foreign financial assets: the Foreign Bank Accounting Report (FBAR) and Form 8938, Statement of Specified Foreign Assets. To encourage the reporting of income from foreign accounts, the FBAR was instituted as part of the Bank Secrecy Act of 1970. The FBAR is filed with the Treasury Department’s Crimes Enforcement Network (FinCEN) and is filed separately from your tax return. Additional reporting is mandated as part of The Foreign Account Tax Compliance Act (FATCA), which was passed in 2010 and requires U.S. taxpayers to report certain foreign financial assets on their income tax return on Form 8938. In recent years, the U.S. government has increased its efforts to investigate and penalize individuals who have failed to comply with these reporting requirements. Although both the FBAR and Form 8938 are for informational purposes only and do not necessarily impact your tax liability, penalties for noncompliance are severe. Compliance is critical. Additionally, any income from these accounts is required to be reported on your tax return because U.S. citizens and residents are subject to income tax on their worldwide income.
When must you file an FBAR?
An FBAR filing is required when you have foreign financial accounts that, in the aggregate, exceed $10,000 at any point during the year. As an example, if you have three accounts in Canada that hold a balance of $5,000 each, you have a filing requirement. In determining the value of any account, you look to the maximum value in that account at any point during the year. For FBAR purposes, all types of financial accounts need to be considered, including bank, investment, and retirement accounts.
Additionally, an FBAR is required for accounts in which you have no financial interest, but for which you have signature authority. Signature authority means you have some control over the funds in the account but are not the owner (for example, someone who authorizes checks from a company’s account).
An FBAR filing is required of any U.S. person who meets the reporting threshold, including individuals, trusts, estates, and other U.S. entities.
When must you file Form 8938?
Form 8938 has filing thresholds that vary depending upon your filing status and where you reside. The thresholds are lower for those residing in the U.S. than for those residing overseas and are lower for separate filers than for those who file jointly. The lowest threshold applies to an unmarried taxpayer who lives in the U.S. Those individuals need to file if their specified foreign assets exceed $50,000 on the last day of the year or $75,000 at any point during the year. In some respects, Form 8938 requires reporting of a broader base of foreign financial assets than the FBAR. For example, you need to report interests in foreign partnerships, various foreign contracts, direct foreign equity interests, and other foreign assets on Form 8938 while the FBAR only requires the reporting of foreign accounts.
If you have foreign financial assets, it is important to understand your reporting requirements because penalties for noncompliance of either the FBAR or Form 8938 are harsh.
At DGC, we have significant experience with preparation and filing related to foreign assets. If you think you may have a reportable asset or to learn more about your specific situation regarding foreign asset reporting, contact a member of your DGC client service team or Stacy Tombarello, CPA, MSA at 781-937-5397 / email@example.com.