Tax season comes around every year, and as taxpayers living in and outside of the United States begin to prepare for their tax returns, they may begin to notice some confusion around what forms they must complete. Especially for expats, American taxpayers living and working abroad, the forms and filing requirements can be plentiful depending on an individual’s qualifications. Today, the team of Orange County FBAR attorneys at Evolution Tax and Legal is breaking down two common forms: the Foreign Bank Account Report and Form 8938, exploring who must file, the difference between these forms, and how we can help with these forms.
What Is an FBAR?
The Foreign Bank Account Report, or FinCEN 114, is commonly referred to as the FBAR and is a form that requires individuals who hold a large amount of money in a foreign bank account throughout the tax year to report this money to the Financial Crimes and Enforcement Network, or FinCEN. The FBAR was put in place to prevent any Americans from evading taxes by holding money in offshore accounts that the U.S. government is not aware of. In addition to Americans reporting their foreign bank account information through FBAR, the Foreign Account Tax Compliance Act, or FATCA, requires all banks to disclose account details of any U.S. citizens to FinCEN. This makes it easier for the IRS to determine if a U.S. expat is holding money in foreign accounts but failing to file an FBAR.
What Is Form 8938?
Similar to the FBAR, Form 8938 is used to report foreign held assets to the U.S. government. These assets include bank accounts, brokerage accounts, stocks or securities from foreign issuers, foreign issued life insurance, and shares in foreign hedge funds or foreign private equity funds. Form 8938 does have some overlap with the FBAR in the information required, but it is a different form. Understanding the differences will help ensure tax compliance among individuals who are expected to file both FBAR and Form 8938.
FBAR vs. Form 8938: Is There a Difference?
Yes, FBAR and Form 8938 are two different forms. Although both serve the purpose of alerting the U.S. government of any foreign held assets, and both require reporting of assets held in a foreign bank account, they are not the same form, and if you are required to file these forms, they will need to be filed separately. One of the most major differences between the FBAR and Form 8938 is who they are filed with: FBAR is filed with the Financial Crimes and Enforcement Network (FinCEN), while Form 8938 is filed with the IRS, similar to an individual’s tax return. Other differences between these two forms are detailed in the below chart:
IRS Comparison of Form 8938 and FBAR Requirements
|Who must file?||Specified individuals, including U.S. citizens, resident aliens and certain non-resident aliens, and specified domestic entities, including certain domestic corporations, partnerships and trusts, that have a financial interest in specified foreign assets and meet the reporting threshold.||U.S. persons, including U.S. citizens, resident aliens, estates, partnerships and trusts, that have an interest in foreign accounts and meet the reporting threshold.|
|Does the United States include U.S. territories?||No.||Yes, resident aliens of U.S. territories are required to file FBAR.|
|Reporting threshold||For specified individuals living in the U.S.:|
– For an individual filing: If the value of foreign held assets was greater than $50,000 on the last day of the tax year, or if the value at any point throughout the year was greater than $75,000.
– For a married couple filing jointly: If the value of foreign held assets was greater than $100,000 on the final day of the tax year, or if the value at any point throughout the year was greater than $150,000.
For specified individuals living outside the U.S.:
– For an individual filing: If the total value of foreign held assets was greater than $200,000 on the final day of the tax year, or greater than $300,000 at any point throughout the tax year.
– For a married couple filing jointly: If the total value of foreign held assets on the final day of the tax year was greater than $400,000, or at any point throughout the tax year the value was greater than $600,000.
For specified domestic entities:
– If the total value of foreign held assets was greater than $50,000 on the final day of the tax year, or greater than $75,000 at any point throughout the tax year.
|Aggregate value of $10,000 held in a foreign bank account at any point throughout the calendar year. This balance is cumulative, meaning if you have two accounts each individually totaling under $10,000 but together they are greater than the reporting threshold, you are still required to file.|
|When do you have an interest in an account or asset?||If any income, gain, losses, deductions, credits, proceeds or distributions from holding or disposing of the account or assets would be required to be reported on your tax return.||You have a financial interest if you are the owner of record or holder of a legal title, if the owner of record or holder of the legal title is your agent, or if you have sufficient interest in the entity that is the owner of record or holder of the legal title.|
You have signature authority if you have the authority to control the disposition of the assets in the account by direct communication with the financial institution maintaining the account.
|What is reported?||The maximum value of specified financial assets must be reported, including financial assets held in a foreign account and other specified assets.||The maximum value of financial assets held in a foreign bank account that is located in another country.|
|How are maximum account or asset values determined and reported?||Fair market value for each U.S. asset is recorded in accordance with the Form 8938 instructions for each account and asset. The value of foreign assets must be converted into U.S. dollars using the end of tax year exchange rate.||Use periodic statements to determine the maximum value in the bank account throughout the tax year. The value of foreign assets must be converted into U.S. dollars using the end of tax year exchange rate.|
|When is the form due?||The form must be attached to your annual tax return and is due on the date of the return.||The form must be filed by April 15, with an automatic extension for individuals living abroad to October 15.|
|How is the form filed?||File with income tax return.||File with FinCEN’s online e-filing system.|
|Penalties||Up to $10,000 for failure to disclose foreign assets, with up to $10,000 additional dollars in penalties per each 30 days after the filing deadline the form is filed. Criminal penalties may also apply.||Penalties are adjusted annually for inflation. Penalties for not filing if not-willful can be greater than $10,000. If the failure to file is determined to be willful, penalties can be greater than $100,000 or up to 50% of the value of assets.|
Types of Foreign Assets and if They Are Reportable
|Types of Foreign Assets||Form 8938||FBAR|
|Financial accounts held at foreign financial institutions||Yes.||Yes.|
|Financial account held at a foreign branch of a U.S. financial institution||No.||Yes.|
|Financial account held at a U.S. branch of a foreign financial institution||No.||No.|
|Foreign financial account for which you have signature authority||No, unless you have a specified interest in the account.||Yes, subject to certain exceptions.|
|Foreign stock or securities held in a financial account at a foreign financial institution||The account itself is subject to reporting, but the contents of the account do not have to be separately reported.||The account itself is subject to reporting, but the contents of the account do not have to be separately reported.|
|Foreign stock or securities not held in a financial account||Yes.||No.|
|Foreign partnership interests||Yes.||No.|
|Indirect interests in foreign financial assets through an entity||No.||Yes, if a sufficient interest in the financial gain or loss of the entity.|
|Foreign mutual funds||Yes.||Yes.|
|Domestic mutual fund investing in foreign stocks and securities||No.||No.|
|Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust for which you are the grantor||Yes to both foreign accounts and foreign non-account investment.||Yes to foreign accounts.|
|Foreign-issued life insurance or annuity contract with a cash-value||Yes.||Yes.|
|Foreign hedge funds and foreign private equity funds||Yes.||No.|
|Foreign real estate held directly||No.||No.|
|Foreign real estate held through a foreign entity||No, but the foreign entity is considered an asset which the value of must be reported.||No.|
|Foreign currency held directly||No.||No.|
|Precious Metals held directly||No.||No.|
|Personal property, held directly, such as art, antiques, jewelry, cars and other collectibles||No.||No.|
|‘Social Security’- type program benefits provided by a foreign government||No.||No.|
Need Help Filing an FBAR or Form 8938?
Filing a tax return can be a complicated process, only made more complex by the addition of foreign bank accounts and asset reporting forms that are required for expats. Working with a professional on the required filings is recommended, to avoid any harsh penalties or fines. If you are living and working abroad, or hold large sums of assets in foreign bank accounts, Evolution Tax and Legal can help make your tax season a breeze. Contact our team today to learn more about your options.