FBAR and FATCA Compliance for Offshore Accounts

Offshore Bank Accounts Can Trigger Filing Obligations Under the Bank Secrecy Act (BSA) and Foreign Account Tax Compliance Act (FATCA)

US taxpayers that have accounts with foreign banks and other foreign financial institutions are subject to reporting requirements under the Bank Secrecy Act (BSA) and Foreign Account Tax Compliance Act (FATCA). Failure to meet taxpayers’ BSA and FATCA reporting obligations can lead to steep penalties—including criminal penalties in some cases.

Most US taxpayers that have foreign financial accounts are required to disclose these accounts to the federal government on an annual basis. While filing thresholds apply, most taxpayers’ offshore accounts will exceed these thresholds—triggering filing requirements with both the Internal Revenue Service (IRS) and the Financial Crimes Enforcement Network (FinCEN).

Our international tax lawyers assist US taxpayers living domestically and abroad with all aspects of offshore bank account disclosure compliance. We also assist clients with reporting foreign mutual funds, ownership interests in foreign entities, and other foreign financial assets when necessary.

Accounts with Foreign Banks and Other Foreign Assets Can Trigger Multiple Federal Reporting Obligations

Federal law requires US taxpayers (including individuals, domestic entities, and foreign corporations) to report foreign financial accounts that exceed the reporting thresholds established under the Bank Secrecy Act (BSA) and Foreign Account Tax Compliance Act (FATCA). These are two separate filing requirements.

In other words, complying with the BSA (by filing an FBAR) does not satisfy taxpayers’ obligations under FATCA, and complying with FATCA (by filing IRS Form 8938) does not satisfy taxpayers’ obligations under the BSA. As a result, to meet their federal tax obligations, taxpayers that own (or hold a substantial ownership interest in) offshore accounts may need to make two separate filings to adequately disclose their foreign account holdings to the federal government.

The filing requirements that apply to reportable accounts are as follows:

IRS Filing Requirements Under FATCA

FATCA, which was passed as a part of the Hiring Incentives to Restore Employment Act (HIRE Act), applies specifically to foreign bank accounts. If a taxpayer holds a bank account in a foreign country that exceeds FATCA’s reporting threshold (or if a taxpayer holds multiple foreign bank accounts that exceed the applicable reporting threshold), the taxpayer must disclose the account(s) using IRS Form 8938. Under FATCA, there are different reporting thresholds for taxpayers living in the US and taxpayers living abroad:

FATCA Reporting Requirements for US Citizens Living Domestically

Taxpayers living in the US must file IRS Form 8938 to disclose their offshore accounts in accordance with the following reporting thresholds:

• Unmarried individuals (or married individuals filing separate income tax returns) must file if the aggregate value of their offshore accounts was more than $50,000 on the last day of the tax year or more than $75,000 at any time during the year.
• Married individuals filing a joint income tax return must file if the total value of their offshore accounts was more than $100,000 on the last day of the tax year or more than $150,000 at any time during the year.

Certain domestic entities are also required to comply with FATCA file if the aggregate value of their offshore accounts was more than $50,000 on the last day of the tax year or more than $75,000 at any time during the year.

IRS Form 8938 is due when taxpayers file their annual federal tax return. Failure to timely report bank accounts held with foreign institutions can lead to allegations of offshore tax evasion, and this can potentially lead to civil or criminal penalties under the nation’s tax laws.

FATCA Reporting Requirements for US Citizens Living Abroad

Taxpayers living abroad are subject to higher reporting thresholds under FATCA. Non-resident taxpayers must file IRS Form 8938 if their financial interest in an offshore bank account (or multiple offshore bank accounts) exceeds either of the following thresholds, as applicable:

• Unmarried individuals (or married individuals filing separate income tax returns) must file if the aggregate value of their offshore accounts was more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year.
• Married individuals filing a joint income tax return must file if the total value of their offshore accounts was more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

The FATCA filing requirements for offshore accounts are intended to prevent tax evasion. As a general rule, US taxpayers have an obligation to report their worldwide income from all sources. Importantly, provisions of FATCA require foreign banks (and foreign branches of US banks) to disclose US taxpayers’ accounts as well—so, even when taxpayers do not comply with FATCA, the IRS and/or foreign tax authorities may still have access to information about their offshore holdings.

FBAR Filing Requirements Under the BSA

The BSA requires US taxpayers to file a Report of Foreign Bank and Financial Accounts (FBAR) with the Financial Crimes Enforcement Network (FinCEN). Like the IRS, FinCEN is a bureau of the US Treasury Department.

While the BSA’s reporting rules apply to foreign bank accounts, they also apply to other foreign financial assets. Additionally, the BSA’s reporting thresholds are lower than the thresholds under FATCA. As a result, even if a taxpayer is not required to comply with FATCA, the taxpayer may still need to file an FBAR to comply with the BSA.

Taxpayers’ reporting obligations under the BSA are as follows:

Accounts Held with Foreign Financial Institutions

All US taxpayers must file an FBAR if the aggregate value of their foreign financial accounts exceeds $10,000 at any time during the calendar year. While this applies to taxpayers that own a financial interest in foreign financial accounts, it also applies to taxpayers who have signature authority (even if they are not account holders directly).

Other Foreign Financial Assets

Along with foreign bank accounts, the BSA’s reporting obligations also apply to other “specified foreign financial assets.” These include, but are not limited to:

• An interest in a foreign estate
• Foreign brokerage accounts
• Foreign hedge funds
• Foreign real estate
• Foreign trusts
• Partnership interests and shares in foreign corporations (foreign stocks)
• Ownership interests in other non-financial foreign entities
• Other foreign financial instruments

Taxpayers who have questions about their obligations under the BSA or FATCA should consult with an experienced international tax attorney promptly. Timely compliance is mandatory, and failure to fully disclose taxpayers’ foreign holdings when required can lead to substantial penalties.

FAQs: What US Taxpayers Need to Know About BSA and FATCA Compliance

Related pages:

• What if I Didn’t File IRS Form 8938?
• IRS Cryptocurrency Investigation Lawyer
• What if I Didn’t File an FBAR?