Thresholds for Reporting Foreign Financial Assets
Do you hold any bank or retirement accounts outside of the United States? If so, you may have filing obligations in addition to your annual tax return. Specifically, if you are a U.S. expat and you have one or more accounts with a foreign financial institution, you may have to disclose information about your foreign financial assets to both the IRS and FinCEN. Under the Foreign Account Tax Compliance Act, or FATCA, U.S. persons who have financial assets outside of the United States may be required to report information about those assets to the IRS on Form 8938, which is also known as the Statement of Specified Foreign Financial Assets. Further, if you meet the threshold to file a Form 8938, you will also meet the threshold to file a Form FinCEN 114, also known as the FBAR (though the converse is not necessarily true).
Foreign financial assets include foreign bank accounts, foreign retirement accounts, foreign mutual funds, foreign life insurance with a cash value, and more. But how do you know if you meet the threshold to file? The filing threshold for Form 8938 depends on a few factors, such as whether you are filing jointly with your spouse, or whether you live outside the U.S. For instance, if you live overseas and are filing a joint tax return with your spouse, then the filing threshold for Form 8938 would be if the total value of all your foreign financial assets is more than $400,000 on the last day of the tax year, or more than $600,000 at any time during the year. It should be noted that the threshold is much lower if you are not married and live overseas – more than $200,000 on the last day of the year and $300,000 at any time during the year. Additionally, if you are unmarried and live in the U.S., the threshold is lower still – $50,000 on the last day of the year, and $75,000 at any time during the year. It is important to note that if you are filing a joint tax return, you need only file one Form 8938 between the two of you.
Does this sound like too much to keep track of? Well, it turns out that if you meet the filing threshold to file a Form 8938, you will also need to file a Form FinCEN 114, or FBAR. The threshold for filing an FBAR is far lower – if the total value of all your foreign financial accounts exceeds $10,000 at any time during the year, you will need to file an FBAR. Further, if you and your spouse both have a filing obligation and you own separate foreign financial accounts, you will need to each file a separate FBAR.
You may be surprised to know that under FATCA, certain foreign financial institutions are required to send information to the IRS about financial accounts held by U.S. taxpayers. Therefore, if you do meet the threshold to file a Form 8938 or FinCEN 114, you must file the forms, as not doing so can open you up to substantial penalties.
What do some of those penalties look like? If you are required to file a Form 8938 and do not do so, you may be subject to a $10,000 failure to file penalty, an additional penalty of up to $50,000 for continued failure to file after the IRS notifies you, and a 40 percent penalty on an understatement of tax attributable to these non-disclosed foreign financial assets.
But that’s not all – there are additional penalties if you meet the threshold to file an FBAR, and do not. To give you some idea, the current maximum penalty for non-willful FBAR non-compliance is $12,921. If you have multiple foreign financial accounts and have not filed in several years, you could be looking at tens of thousands of dollars in penalties, and that’s just if you can prove that the non-compliance was non-willful!
Finally, please note that Form 8938 is filed together with your federal tax return (and the due date is the same as for your tax return), but the FBAR is not – it is filed on a separate Web site, and can only be e-filed. For these reasons and more, if you own any foreign financial accounts, please get in touch with us today to ensure that you are filing these forms timely and accurately. This is simply not the kind of thing worth taking a chance on, as the risk of not filing, or filing incorrectly, far outweighs the cost of getting professional help.