FBAR and FATCA: What Do I Need to Know?

by Aug 11, 2022Tax Filing Requirements, Tax Planning

FBAR and FATCA: What do I need to know?

FBAR and FATCA just might be the two most detested, feared and misunderstood acronyms in the expat tax lexicon. Shrouded in mystery and backed by severe penalties, the FBAR and FATCA are at least partially responsible for the record breaking number of Americans that have been renouncing their citizenship since FATCA was enacted in 2010.

If you have a financial interest in or signatory authority over an offshore financial account (e.g. a foreign bank account or brokerage account) understanding FBAR and FATCA requirements is key to avoiding a problem with the IRS or the Financial Crimes Enforcement Network. In this blog, we differentiate between the FBAR and FATCA and explain what you need to know to be compliant.

So what are they? How are they the same or different?

At a fundamental level, the FBAR (Foreign Bank Account Report) and FATCA (Foreign Account Tax Compliance Act) are self-reporting requirements the US federal government uses to protect against financial crimes such as tax evasion and money laundering.

The FBAR was established in the 1970 as part of the Bank Secrecy Act and gained teeth in The Patriot Act as a tool against international terrorism. It is not uncommon for US persons to have financial accounts in foreign countries, but without being required to report it, not many would admit it. The FBAR is the IRS’s attempt to solve this problem by requiring self reporting by filing FinCEN Form 114 (Report of Foreign Bank and Financial Accounts) each year by anyone with an aggregate of more than 10k USD in one or more foreign accounts.

FATCA was established in 2010 and is actually a requirement of non-US financial institutions to report on the accounts they hold for US persons. The impact of this requirement has caused numerous headaches for the average American citizen. Since FATCA was implemented, numerous foreign banks now refuse to accept US citizens for anything from a simple bank account to a home mortgage.

FATCA also allows government personnel to locate US persons not living in the United States, in order to assess US tax or penalties. As a result, many domestic banks have started closing the accounts of US persons they know to be living outside of the United States to avoid having to comply with FATCA. FATCA also requires individuals with more than 200k in foreign assets to self-report all foreign assets via FATCA (Form 8938 Statement of Specified Foreign Financial Asset) on an annual basis along with their US tax return (Form 1040).

Do I have to file FBAR? Probably.

You are required to file an FBAR form (FinCEN Form 114), if you are a US person living inside or outside the United States and you have an aggregate balance that meets or exceeds $10K in your foreign financial accounts – even if it was just one day out of the year. And yes, that’s $10k in all your foreign accounts added together. If you have three accounts with $5k in each, your aggregate amount is 15k, 5k over the reporting limit and you would be required to file the FBAR for each account.

Do I have to file FATCA? Maybe.

FATCA has a higher threshold when it comes to who is required to self report. If you are unmarried or file your taxes separately and live outside of the United States and have assets valued at over $300k on any day of the year or more than 200k on the last day of the tax year, you would be required to self report. If you are married, you can have up to $600k on any day of the year and $400k on the last day of the tax year before you cross the threshold and need to report.

If you live in the United States and are unmarried or file your taxes separately, you still need to self report all foreign accounts if you have an aggregate balance that meets or exceeds $75k anytime during the calendar year, or if you have assets valued at more than $50k on the last day of the tax year. If you are married, the limits are $150k and $100k respectively. Note that if you meet the threshold for FATCA, you still need to file the FBAR as well.

What happens if I don’t file?

If you are living outside the United States, it is very likely that you are required to file at least the FBAR and maybe both the FBAR and FATCA forms on a yearly basis. The information you provide for FBAR and FATCA do not, in themselves, result in an additional tax burden but failure to file can result in severe penalties.

If you willfully fail to file FBAR, civil penalties can go up to $100k or 50% of your account value, whichever is greater; and in extreme cases, criminal penalties of up to 5 years in prison. Penalties are also harsh if you do not file FATCA Form 8938. There is an initial $10k penalty for failing to file that can go up to $60k and criminal penalties may also apply.

Oh no, I haven’t been filing either, what do I do?

Fortunately, if your omission was not due to willful conduct, the IRS allows non-resident US taxpayers to use it’s Streamline Filling processes to make amends. You can file up to 6 years of unreported FBAR statements without penalty by filing delinquent FBARs according to FBAR instructions.

For FATCA, if you meet the general eligibility criteria, you might be able to use the IRS’ Streamlined Foreign Offshore Procedure (SFOP). However, determining whether or not you are qualified for SFOP can be tricky.

Here at MCA we specialize in the IRS’ Streamline Filing processes as well as cross border financial planning and taxes. Please feel free to schedule a consult if you’d like to discuss your FBAR and FATCA filing requirements, the Streamline Filing processes or any other cross border financial questions. We’re here to help!

Nancy Zheng

Nancy Zheng

Tax Manager

Lissa Anderson

Lissa Anderson

Associate Cross Border Financial Planner

MCA Cross Border Advisors, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The content of this presentation is for information purposes only and should not be construed as investment or financial advice. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.