While most Americans living abroad are familiar with their US tax filing obligations, two less well-known forms are the FBAR and FATCA. The Foreign Bank Account Report (FBAR) and Foreign Account Tax Compliance Act (FATCA) are crucial forms, and failure to file them when required could result in penalties totalling thousands of dollars.
Also known as FinCEN Form 114, the FBAR is a mandatory report that US expats must file if they have foreign financial accounts that collectively exceed 10.000 US dollars during any point of the year.
This can often affect more people than realise it. For example, a US expat who moves 5.001 US dollars from one account into another will have to file, as their total balance for that day will be over 10.000 US dollars.
While the FBAR is reported to FinCEN and not the IRS, it must be submitted alongside the annual US expat tax return. However, expats are granted an automatic extension until October 15 to file the FBAR. As the extension is automated, there is no need to file additional paperwork, but it's critical to note your reason for filing late as being due to claiming the automatic extension.
Contrary to how it might sound, "financial accounts" doesn't just mean any bank accounts that you might have. Financial accounts include:
However, some things that people often mistake as being included financial accounts aren't. Exempted accounts that do not need to be reported on the FBAR include:
For US expats with foreign financial accounts, monitoring their accounts is crucial to determine if FBAR filing is necessary. The FBAR requirement is based on the highest balance across all foreign accounts. For instance, if one account has a balance of 2.000 US dollars, another has 8.000 US dollars, and a third has 1.500 US dollars, the total combined balance would exceed the reporting threshold, making FBAR filing mandatory.
FBAR filing requirements extend to all foreign accounts where the individual has either a financial interest or signature authority.
If an individual has direct or indirect ownership of an account, they must file an FBAR. Direct ownership occurs when the individual's name is on the account. In contrast, indirect ownership involves situations where someone else's name is listed on the account (for example, a business partner, spouse, or friend), but the individual still holds an ownership stake.
This applies to individuals who do not own the funds but have the authority to manage transactions and other account activities. This includes foreign savings accounts (such as trusts) owned by dependents of US expats living abroad.
Known as FATCA or Form 8938, the Foreign Account Tax Compliance Act is reported to the IRS as part of US expats' annual tax returns. The foreign financial accounts required for FATCA reporting are for foreign financial assets. This includes foreign financial accounts, stocks or securities in foreign corporations, and any interest in a foreign entity.
The account balance thresholds for filing FATCA are:
While the FBAR may seem like a minor requirement, its purpose is to combat global money laundering. Failure to comply with FinCEN regulations could result in significant penalties.
Penalties are divided into two categories: wilful and non-wilful failure.
For US expats who have never filed an FBAR, FATCA or US tax return since living abroad, there is the streamlined procedure. This is an amnesty program from the IRS that allows US citizens abroad to file six previous years of FBARs and three years of unfiled tax returns without penalties.
To qualify for this, the IRS must not have contacted you about missing tax returns or FBARs, as that results in an automatic disqualification.