The Hiring Incentives to Restore Employment (HIRE) Act in 2010 includes the Foreign Account Tax Compliance Act (FACTA), which requires certain individual taxpayers to file Form 8938, Statement of Foreign Financial Assets, commonly referred to as Tax FBAR.
This new reporting requirement is in addition to filing Treasury Department Form 90-22.1 (Report of Foreign Bank and Financial Accounts), more commonly known as FBAR. Although these two acronyms look similar, there are some very significant differences.
The FBAR is not a tax filing requirement. It is part of a set of laws called the Bank Secrecy Act. Although the forms are filed with Internal Revenue Service (IRS), the rules governing the reporting requirements are not tax based. Examination and enforcement authority related to FBAR filings has been delegated to IRS. A primary purpose of the FBAR filing is to track hidden money in foreign financial accounts used for illicit purposes (e.g., tax evasion, money laundering or terrorism).
The primary purpose of Tax FBAR is to enforce higher tax compliance among United States taxpayers with specified foreign financial assets (SFFA). This filing requirement does not replace or otherwise affect a taxpayer’s requirement to file FBAR; this is a tax form that needs to be filed in addition to TD F 90-22.1.
There are several notable differences between the FBAR and Tax FBAR filings. A few of the more basic differences are described below; however, many others exist in the details of the filing instructions and regulations, and taxpayers should carefully follow the guidance and exceptions for both filings.
Who does each filing pertain to?
FBAR pertains to individuals and domestic entities that have a financial interest in foreign financial accounts. It also pertains to individuals that have signatory authority over foreign financial accounts (e.g., bank, brokerage, and investment accounts). Currently, Tax FBAR is only required to be filed by certain U.S. specified individuals for 2011; domestic entities are not required to file. IRS, however, anticipates issuing regulations that will require certain domestic entities to file in future years. Tax FBAR reports the ownership (not signatory authority) of SFFAs (e.g., certain financial accounts, certain interests in foreign entities, and certain financial instruments or contracts with a non-U.S. counterparty) as well as the tax item (e.g., interest, dividends and royalties) attributable to those SFFAs.
What are the thresholds for filing?
In general, a U.S. person (individual or domestic entity) must make a FBAR filing if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. Varying thresholds apply to Tax FBAR filings, dependent on the marital status and country of residence of the specified individual. Unmarried specified individuals living in the United States must file if the total value of the SFFAs is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. These thresholds increase to $100,000 and $150,000, respectively, for married specified individuals living in the United States. Unmarried specified individuals living abroad must file if the total value of the SFFAs is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year. These thresholds increase to $400,000 and $600,000, respectively, for married specified individuals living abroad. Specified individuals living outside the United States must satisfy certain presence abroad tests in order for these increased thresholds to apply.
What are the penalties for non-compliance?
Currently, both FBAR and Tax FBAR carry monetary penalties for failure to file. These monetary penalties start at $10,000 for each non-willful violation where the reasonable cause exception does not apply. Willful FBAR violations can increase the penalty to the greater of $100,000 or 50 percent of the amount in the foreign financial account for each violation. The additional maximum Tax FBAR failure to file penalty is $50,000. Tax FBAR filings also carry accuracy-related penalties up to 40 percent of the underpayment related to the undisclosed SFFA. For example, this penalty might be assessed against an individual taxpayer who received a taxable distribution from a foreign pension that was not reported on Form 8938 and Form 1040.
Non-filings of FBARs and Tax FBARs can result in other negative consequences. In certain instances, willful FBAR violations can carry both civil and criminal non-monetary penalties. Since Tax FBAR is a tax filing, IRS has the ability to keep the statute of limitations open on all or part of the associated annual income tax return until three years after the date on which the Tax FBAR form is filed.
What are the due dates and filing methods?
Another important difference between the two filings relates to the due date and method of filing for each form. As was mentioned previously, FBAR is not a tax form; therefore the filing deadline of June 30th does not coincide with other tax filing deadlines. In addition, the "mailbox rule" does not apply; the form must be received by IRS by the filing deadline. Tax FBAR filings must be attached to and filed with the taxpayer’s annual income tax return by the due date of that return. Accordingly, the mailbox rule applies to Tax FBAR filings similar to the annual income tax return — timely mailed is timely filed.
Although the acronyms are similar, the FBAR and Tax FBAR filings have significant differences in both purpose and reporting. The Justice Department and IRS have ongoing efforts to pursue and prosecute those that are negligent in filing the proper FBAR forms. IRS recently reopened the Offshore Voluntary Disclosure Program to encourage those with delinquent filings to get current. The addition of Tax FBAR creates additional filing responsibilities for individual taxpayers with SFFAs, and it appears it will create an additional filing burden for certain domestic entities in the near future.
Sallie J. Faucett is a Director of WTAS located in the Seattle, WA. office. She has over 14 years' experience in tax compliance and consulting, advising clients on a variety of matters. Before joining WTAS, Sallie practiced with an international professional services firm in Seattle for 11 years. She has spent much of her professional career working closely with and assisting tax departments of large, complex, multi-state corporations with their federal and state income tax filing obligations. She has also worked with large public and private corporations on their financial statement tax provisions (ASC 740), financial statement disclosures and purchase accounting. Her experience has been with a wide variety of industries, including software and technology, manufacturing and distribution, and telecommunications.
WTAS has offices in Baltimore, Chicago, Greenwich, Harrisburg, Los Angeles, New Jersey, New York City, Palo Alto, Philadelphia, San Francisco, Seattle, Washington, DC and West Palm Beach.