Foreign Asset Reporting Requirements Update:
FBAR and FATCA for 2016 Tax Year
Our last report on foreign asset reporting accounts (i.e., Report of Foreign Bank and Financial Accounts, or “FBAR” and Foreign Accounting Tax Compliance Act/Bank Secrecy Act BSA Form 8938 known as “FATCA”) was published for the 2013 tax year. Not a lot has changed since then, but note the following.
Starting in the 2014 tax year, the method for determining the minimum foreign financial account value for purposes of determining whether FBAR filing requirements apply to a US person is the aggregate maximum value at any time during a year exceeding $10,000. Then, the maximum value at any time for each account is reported, even for accounts with a zero balance. Formerly, the test involved adding the maximum values during the year of each foreign financial account, which meant, e.g., that a US person holding the same $5,001 in each of two accounts at different times of the year would have to file an FBAR. Now, the method of calculation of minimum foreign financial assets that trigger the requirement to file under FBAR and FATCA are the same, although the minimum dollar amount is different ($10,000 for FBAR and $50,000 on the last day of the year, or $75,000 at any time during the year, for US residents, for FATCA, with higher minimums ($200,000 and $300,000) for non-US residents).
As in the past, the FBAR is filed on Form 114. The current form for individuals is on the BSA e-filing website here. FINCen has announced no changes to the form this year, but on December 16, 2016 it announced a new filing due date. The FBAR Form 114 is now due on the tax return filing due date (April 18, 2017 for the 2016 reporting year) rather than on June 30, as has been the case in the past. Note that the filing deadline for the FATCA Form 8938, due with the individual’s tax return filed with the IRS, is extended when the due date for the tax return is extended, whereas six-month maximum extension for filing of the FBAR Form 114 is filed separately. Previously, there was no provision for an extension of the filing deadline for the FBAR Form 114. US citizens living abroad are entitled to an automatic FBAR extension until June 16, and to a four-month extension thereafter upon request (see Luca Cantinelli article linked below).
The current FATCA Form 8938 can be found here and the 2016 instructions can be found here. There are no significant changes for this filing year for individuals, but for tax years beginning after December 31, 2015, certain domestic corporations, partnerships, and trusts that are considered formed or availed of for the purpose of holding, directly or indirectly, specified foreign financial assets (“specified domestic entities”) must file Form 8938 if the total value of those assets exceeds $50,000 on the last day of the tax year or $75,000 at any time during the tax year. Individuals who are partners, shareholders or beneficiaries of specified domestic entities do not for the reason of such status have to file, however.
The postponed FBAR filing deadline for signatories on financial accounts who have no interest in the accounts has been extended yet another year, to April 15, 2018, as has happened for the previous four years. The purpose of the extension is to enable FINCen to develop and issue a regulatory clarification. Individuals probably will have no interest in this issue unless they are signatories on accounts on behalf of their employers.
To review the penalties for failure to file:
(1) For non-willful failure to file the FBAR — $10,000
(2) For willful failure to file the FBAR — up to the greater of $100,000 or 50% of the account balances, plus possible criminal penalties
(3) For failure to disclose reportable foreign financial assets on FATCA Form 8938 – up to $10,000
(4) For failure to file after the IRS has sent a notice of failure to disclose — $10,000 for each 30 days of failure, for a total maximum penalty (including the initial $10,000) of $60,000, plus possible criminal penalties
Legislation changing the due date for the FBAR Form 114 permits the IRS to waive the penalty for failure to timely file a request for extension for first-time filers. Luca Cantinelli (see link to article below) reports that included in the original legislation was a provision permitting the IRS to revoke the passport of any individual who has more than $50,000 in unpaid taxes and she speculates that such a provision might be added to other legislation in the future.
According to tax attorney Anthony Verni (see link to article below), civil enforcement of FBAR requirements were delegated to the IRS by FINCen under a Memorandum of Understanding between the IRS and FINCen. The MOU gives the IRS the authority to:
1. Investigate possible civil violations;
2. Assess and collect civil FBAR penalties;
3. Employ the summons power;
4. Issue administrative rulings; and
5. Take any other action reasonably necessary for enforcement, including pursuit of injunctions.
The IRS may waive penalties for failure to file for reasonable cause.
As regards the effect of the adoption of FATCA on FBAR enforcement, Verni says that FATCA requires foreign financial institutions internationally to conduct in-depth due diligence and to collect information to identify and disclose to the IRS US account holders and US beneficial owners of foreign financial assets. This information can be used to pursue US persons who fail to file under FBAR rules. He advises that:
“It is vitally important you seek counsel in dealing with FBAR filing and related issues. Once a U.S. person is under IRS audit or whose non-compliance has been identified by the government, there are no corrective remedies available for FBAR compliance. A US person concerned that the government may view any FBAR errors or omissions as “willful” should engage legal counsel to fully evaluate the facts and circumstances and assess the potential civil and criminal exposure in order to resolve the matter before the IRS gets involved.”
Peter Kuenzi, CFP, of Thun Financial Advisors (see link to article below) sums up the enforcement situation before and after the adoption of FATCA by noting that, generally, US taxpayers could ignore FATCA, FBAR and PFIC (passive foreign investment company) reporting requirements (“long standing reporting and filing rules that have been widely and safely ignored until FATCA’s passage”) with little risk because they were virtually unenforceable. The draconian penalties imposed on international financial institutions if they fail to to comply with FATCA requirements that they report foreign financial assets held by US persons, however, make identification of and enforcement of non-filers under all of the foreign asset reporting rules much more likely.
For a summary of (and link to) a recent case on willfulness in connection with failure to make an FBAR filing (Kentera v. United States, 2017 U.S. Dist. LEXIS 12450 (ED WI 2017)), see the second J.L. Jecker article linked below. According to the article, the nonwillful FBAR penalties were assessed against a taxpaying couple as the result of an audit after the taxpayers withdrew from the IRS’s 2011 Offshore Voluntary Disclosure Initiative (OVDI). Three separate accountants over a six-year period failed to file FBAR Form 1114 for an inherited Swiss bank account about which the taxpayers had informed all of their accountants. Finding that failure of their accountants to advise them as to FBAR requirements did not constitute “reasonable cause” for waiver their penalties, over $90,000 in penalties were assessed against them by the IRS.
To emphasize the importance of not ignoring foreign financial asset reporting requirements, Kuenzi says the following are the practical implications for Americans living abroad:
“Many, many Americans who would not dream of not complying with all applicable tax rules have nevertheless been “casually” non-compliant because so many rules existed that until the passage of FATCA had very rarely been enforced. In the absence of any real threat of enforcement, individuals and even tax professionals had been woefully ignorant of rules such as FBAR or PFIC. FATCA ended this easy accommodation. Old rules, never before seriously enforced, are now easily and commonly enforced as FATCA is widely implemented.”
Kuenzi provides step-by-step advice for Americans abroad, including that they move their foreign investments to US financial institutions, not just overseas branches of US financial institutions, in order to avoid the difficulties and uncertainties involved in FATCA compliance.
Note that, while this article deals only with FATCA and FBAR reporting requirements, foreign assets also are reportable under passive foreign investment company (PFIC) rules found in Section 1298(f) of the Internal Revenue Code, which, if anything, are more complex than those for FATCA and FBAR (see several useful blog articles linked below). PFIC income is reported on IRS Form 8621. Reportedly, however, under final regulations adopted on December 28, 2016, the annual reporting requirement has been eliminated, but only for certain “dual resident taxpayers.”
Previous Solari Reports:
Comparison of Form 8938 and FBAR Requirements (updated/current May 4, 2016)
Summary of FATCA Reporting for U.S. Taxpayers (updated/current November 7, 2016)
Offshore Voluntary Disclosure Program (posted June 26, 2012)
FBAR Filing FAQs V 1.0 (posted March 28, 2014)
Luca Cantinelli, Esq. (Solomon Blum Heyman LLP) “Foreign Bank Account Report (FBAR) Due Date Changed – Effective for Tax Year 2016”
Anthony N. Verni, Esq. (Verni Law Offices, LLC, undated) FBAR Enforcement: How and When the IRS Will Act?
David Kuenzi, CFP (Thun Financial Advisors, 2016) “What is FATCA (Foreign Account Tax Compliance Act)? What do American Investors Need to Know?” and ”Why Americans Should Never Own Shares in a Non-US Mutual Fund (PFIC)” and “Americans in the UK Need to Avoid this Catch-22 Investment Trap”
Ed Zollars, CPA “Final Regulations Published Related to Determining Ownership of PFICs and Reporting Requirements” (December 29, 2016)
V. L. Jecker (Let’s Talk about US Tax, January 9, 2017) “PFIC Break for Some: No Need to Annual File Form 8621”
V. L. Jecker (Let’s Talk about US Tax, February 5, 2017) “FBAR Penalty: IRS Has No Sympathy for Taxpayer When Accountants’ Made Continual Errors”
This article does not constitute legal or tax advice and should not be taken as such. A US person required to file under FBAR or FATCA, or to report income under foreign investment company filing requirements is strongly advised to consult a tax attorney or accountant regarding the complex filing and reporting requirements.