The FBAR and Form 8938 are used to report foreign financial assets to the U.S. government. Both the FBAR and Form 8938 trigger large penalties for failure to file.
While the function of the FBAR and Form 8938 is very similar, there are differences between the two forms. One has a higher filing threshold than the other. And one is submitted to U.S. Treasury (the FBAR) while the other is submitted to the IRS along with your tax return (Form 8938).
The purpose of this post is to summarize the differences between the FBAR and Form 8938 so that taxpayers with foreign assets will be informed about the rules and stay out of tax trouble.
FBAR Reporting Threshold
The Foreign Bank Account Reporting Rules (“FBAR”) apply to any taxpayer with an interest in a foreign financial account with an aggregate value of over $10,000 at any time during the year. The same $10,000 threshold applies for taxpayers with signature authority over a foreign financial account.
Application of the FBAR rules requires aggregation of foreign account balances. For example, if an individuals has 10 foreign bank accounts with $3,000 in each, all 10 bank account need to be reported under the FBAR rules, even though the balances in each individual accounts are less than $10,000.
Who Needs to File FBAR
The FBAR rules apply to US citizens, green card holders, US resident aliens, or dual status aliens. See our article on Nonresident Alien vs Resident Alien for an explanation of residency status for tax purposes.
Where a person lives does not matter for the FBAR. The rules apply to individuals if they are living either inside or outside the U.S.
Filing FBAR Online
FBAR is reported on a Treasury form, the FINCEN 114. It is a disclosure form only and does not trigger a tax.
The form is filed with the Financial Crimes Enforcement Network, which is a bureau of the U.S. Department of Treasury. It is is not part of the IRS.
The form must be filed electronically through FinCEN’s BSA E-Filing System. Do not attach the FBAR to your federal tax return. It is filed separately.
FBAR Deadline and FBAR Extension
The FBAR is due by April 15 of the next year.
For taxpayers on extension, the due date is pushed back to October 15.
Which Foreign Financial Accounts Require FBAR Reporting
The FBAR rules apply to a wide range of foreign financial accounts. These include:
- Financial accounts held at foreign financial institutions
- Financial accounts held at a foreign branch of a U.S. financial institution
- Foreign financial account for which you have signature authority
- Foreign stock held in a financial account at a foreign financial institution
- Indirect interest in foreign financial assets through an entity (if ownership is greater than 50%)
- Foreign mutual funds
- Foreign-issued life insurance or annuity contract with cash value
- Foreign accounts held by a grantor trust of which you are the grantor
FBAR Penalty by Financial Crimes Enforcement Network
FBAR late filing penalties are severe.
Non-willful failure to file an FBAR may result in civil penalties. “Non-willful” refers to conduct that is due to negligence, mistake, ignorance or misunderstanding. Civil penalties for non-willful behavior are $10,000 “per violation.”
In 2023, the U.S. Supreme Court ruled that the $10,000 civil penalty for FBAR reporting is for all accounts per year, in total, not per foreign account. (Bittner, No. 21-1195 (U.S. 2/28/23)). The court noted that the failure to file an FBAR for multiple foreign accounts in one year should be considered as “one violation carrying a maximum penalty of $10,000, not a cascade of such penalties calculated on a per-account basis.”
Willful non-filing of an FBAR may result in both civil and criminal penalties. “Willful” refers to an intentional violation of a known legal responsibility. Civil penalties for willful behavior can be as high as the greater of $100,000 or 50% of the account balance. Criminal penalties may be imposed, which include prison time.
For more details on penalties, including what to do about them, see our Guide to IRS Tax Penalties.
FBAR Penalty Abatement
The IRS may abate FBAR penalties for taxpayers in certain cases. This requires the taxpayer to demonstrate that they had “reasonable cause” for failing to file an FBAR for any foreign financial asset.
Understanding the nuances of penalty abatement is crucial for taxpayers facing potential penalties. The term “reasonable cause” is often interpreted through various factors, such as the taxpayer’s compliance history, the complexity of the tax laws applicable to their situation, and the efforts made by the taxpayer to comply with the tax obligations. Demonstrating reasonable cause may involve providing documentation that shows the taxpayer’s reliance on incorrect professional advice or unforeseen circumstances that prevented timely filing.
Additionally, it is important for taxpayers to be proactive in addressing any FBAR filing deficiencies. This can include engaging with tax professionals who are well-versed in international tax compliance and who can provide guidance on how to rectify past non-compliance issues. Taxpayers should also consider participating in IRS programs designed to encourage voluntary compliance, which may offer further avenues for penalty relief.
Ultimately, the goal is to ensure that all foreign financial accounts are accurately reported to avoid future penalties and to maintain compliance with U.S. tax laws.
FBAR vs 8938
Form 8938, Statement of Specified Foreign Financial Assets, is yet another foreign account disclosure form. However, unlike the FBAR, Form 8938 is attached to and reported with the annual tax return.
Should I file the FBAR or Form 8938? It depends on the balances in your foreign financial accounts. You may need to file both.
It’s essential to understand that the FBAR and Form 8938 serve different purposes and have distinct reporting requirements. The FBAR focuses primarily on foreign bank accounts, while Form 8938 encompasses a broader range of specified foreign financial assets, including foreign stocks, mutual funds, and interests in foreign partnerships. This means that even if your foreign bank accounts do not meet the FBAR threshold, you might still be obligated to file Form 8938 if your other foreign financial assets exceed the specified thresholds.
Additionally, the penalties for failing to file these forms can be severe. The FBAR can lead to both civil and criminal penalties, especially in cases of willful non-compliance, while Form 8938 penalties are primarily financial. However, both forms aim to combat tax evasion by ensuring that U.S. taxpayers disclose their foreign financial interests.
It’s also important to note that the information reported on Form 8938 is used by the IRS to enforce the Foreign Account Tax Compliance Act (FATCA), which requires foreign financial institutions to report information about financial accounts held by U.S. taxpayers. This means that the IRS can cross-reference the data from Form 8938 with information provided by foreign financial institutions to ensure that taxpayers are accurately reporting their foreign assets.
In conclusion, while both the FBAR and Form 8938 are crucial for reporting foreign financial assets, they serve different roles in the broader landscape of international tax compliance. Taxpayers should carefully review their foreign financial holdings and consult with tax professionals to determine their specific reporting obligations and avoid potential penalties.
Form 8938 Filing Requirements for Specified Foreign Financial Assets
Form 8938 has its own set of filing requirements which are different than the FBAR.
The scope of Form 8938 extends beyond merely foreign bank accounts to encompass a broader range of specified foreign financial assets. This includes foreign stocks, foreign partnership interests, and foreign hedge funds. Taxpayers must also report foreign mutual funds and foreign-issued life insurance policies with cash value. Additionally, foreign financial accounts maintained at foreign financial institutions or foreign branches of U.S. financial institutions are included under Form 8938 reporting obligations.
Form 8938 is required to be filed by certain domestic entities, such as corporations, partnerships, and trusts, if they hold interests in specified foreign financial assets above the reporting threshold. The form must be attached to the taxpayer’s annual federal income tax return, and the information must be accurate to avoid significant penalties.
It is important to note that the reporting thresholds for Form 8938 vary based on the taxpayer’s filing status and residency. For instance, higher thresholds apply to taxpayers living outside the U.S., reflecting the increased likelihood of holding foreign assets. Understanding these thresholds is crucial for ensuring compliance with the reporting requirements.
Moreover, Form 8938 requires taxpayers to disclose the maximum value of their specified foreign financial assets during the tax year, as well as detailed information about the assets, including the name of the foreign financial institution and the account number. This comprehensive reporting helps the IRS track foreign assets and combat tax evasion. Failure to file Form 8938 or providing inaccurate information can result in substantial penalties, emphasizing the importance of thoroughness and accuracy in reporting.
Summary of Filing Thresholds for Form 8938
The dollar value filing requirements for Form 8938 may be summarized as follows:
Situations where Form 8938 is required for taxpayers living in the US:
- Taxpayers who are unmarried or married filing separately: Total value of assets is more than $50,000 on the last day of the year, or more than $75,000 at any time during the year
- Taxpayers who are married filing jointly: Total value of assets is more than $100,000 on the last day of the year, or more than $150,000 at any time during the year
Specified domestic entities, which include certain corporations, partnerships, and trusts, are also subject to reporting if they have an interest in specified foreign financial assets that exceed certain thresholds.
Situations where Form 8938 is required for taxpayers living outside of the US:
- Taxpayers who are unmarried or married filing separately: Total value of assets was more than $200,000 on the last day of the year, or more than $300,000 at any time during the year
- Taxpayers who are married filing jointly: Total value of assets was more than $400,000 on the last day of the year, or more than $600,000 at any time during the year
Form 8938 Penalty
The IRS imposes a penalty of up to $10,000 for failure to file Form 8938 on time.
In addition, the IRS may also impose an additional $10,000 for each 30 days that the form is late, up to $50,000. In other words, the combined penalty may go as high as $60,000, per year.
Beyond the financial burden, failing to file Form 8938 can lead to increased scrutiny from the IRS, potentially triggering audits or further investigations into one’s financial activities. This underscores the importance of understanding and complying with the reporting obligations related to specified foreign financial assets. Additionally, the failure to file Form 8938 may also impact the statute of limitations on the taxpayer’s entire income tax return, extending it significantly. This means that the IRS could have more time to review and assess taxes, interest, and penalties on a taxpayer’s entire return, not just the unreported foreign assets.
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