The Foreign Account Tax Compliance Act (FATCA, or Form 8938) and the Foreign Bank Account Reports (FBAR, or Form 114) are, conceptually, killing one bird with two different stones. FATCA was signed into law in 2010, with an aim to levy certain taxes on U.S. citizens and entities with substantial overseas holdings and the overseas institutions that enable some sorts of tax evasion.
FBAR was a little-enforced portion of the Bank Secrecy Act of 1970 that has seen its revival in the wake of the financial crisis of 2008, which resulted in a renewed desire by the Department of the Treasury to crack down on tax evasion. The Internal Revenue Service went so far as to issue a press release in 2008 reminding filers of the potential necessity of filing Form 114.
Differences Between FATCA and FBAR
With FATCA finally beginning to be locked into place, it is important to understand the four major ways in which FATCA and FBAR differ:
1) Filing thresholds
Under FATCA and FBAR, any individual with offshore holdings may be subject. Entities tend to have slightly more variation based on the type of entity in question – and there is no simple answer for this. The best way to understand whether you are subject to FATCA or FBAR is to calculate your foreign holdings and, if you exceed the minimum thresholds, consult a tax professional to ensure that you are – or are not – subject.
For FBAR, the threshold is relatively simple. If you have assets in foreign accounts that cumulatively exceed $10,000, you are required to report on all of your foreign accounts. For FATCA, things get much more complex. As a domestic entity, the threshold is $50,000 at any point during or on the last day of the tax year.
For individuals, there are two additional classifications. For residents, the threshold changes when you are married. For an unmarried individual, you must report if your foreign assets exceed $50,000 on the last day of the tax year, or if they exceeded $75,000 during any point during the tax year. For married individuals filing jointly, the threshold is $100,000 on the last day of the tax year, or if foreign holdings exceeded $150,000 at any point during the tax year.
The final consideration for U.S. citizens is residency. For individuals living outside of the U.S., the thresholds are $200,000 on the last day of the tax year and $300,000 at any point during the tax year. For married individuals filing jointly while living abroad, the threshold is $400,000 on the last day of the tax year and $600,000 at any point during the tax year.
2) States versus territories
Not all lands that are in U.S. jurisdiction are equal in terms of reporting requirements for holding foreign assets. In the 50 states, the filing requirements are basically the same for FATCA and FBAR. Citizens and entities, trusts and certain other taxable accounts that are based in the States have the same requirements. However, once you embark onto land that belongs to one of the 16 territories of the United States (American Samoa, Guam, Northern Mariana Islands, Puerto Rico, U.S. Virgin and Minor Outlying Islands), the requirements differ for certain residents. Under FATCA, resident aliens of U.S. territories and territory-based entities are not subject to reporting. FBAR, however, requires filing from all residents of U.S. states and territories.
3) How requirements are reported
There are subtle differences in the manner requirements are reported for FATCA and FBAR. Under both filings, the reporting amounts to the maximum value of foreign financial assets held in accounts with financial institutions located in another country – additionally, under FATCA, foreign assets held in foreign institutions on U.S. soil and certain other foreign non-account investments are required.
These values are also calculated differently under each provision. When reporting FATCA, the value of the assets is calculated by using year-end exchange rates to convert to U.S. dollars, and for holdings not accounted in currency, there are specific instructions on the form for determining fair market value. FBAR also uses year-end exchange rates, but requires the use of periodic statements throughout the year to determine the maximum account value in accordance with the filing.
In addition, the reporting for each differs in its timing and the manner of reporting. FATCA will be reported as part of the yearly tax return to the Internal Revenue Service, and as such, is due by April 15, and can be filed in a number of ways in accordance with IRS standards. FBAR is also due by tax day, but the deadline is automatically extended six months to October 15 for those who miss the initial deadline. FBAR must be reported through the Financial Crimes Enforcement Network (FinCEN) Bank Secrecy Act E-Filing System, https://bsaefiling.fincen.treas.gov/main.html) and, as such, is not filed as part of the federal tax return.
4) Penalties for avoidance
Certainly, this is information one would hope to never hold relevance – but it is important to understand what penalties one faces by not filing. Under FATCA, the initial penalty may be up to $10,000, with an additional $10,000 for failure to report each 30 days after notice is received from the IRS to file, with a maximum limit of $60,000.
Under FBAR, there is a distinction between willful and non-willful evasion, where a non-willful evasion may incur a penalty of up to $10,000, adjusted for inflation from the filing year in question. If the evasion is willful, the penalty may be up to the greater of $100,000 or 50% of the holdings in question.