What is the Difference Between 'FBAR' and 'FATCA'?
The FBAR (Report of Foreign Bank and Financial Accounts) is a separate form that the Internal Revenue Service requires expats and those with certain foreign bank accounts to file at the same time as, but not with, their regular tax returns. Until 2016, the filing deadline was in June, so foreign account holders should be aware of this change. Moreover, the Service now grants an automatic extension of time to file an FBAR. Previously, no extensions were allowed.
"FATCA" is an acronym for the 2010 Foreign Account Tax Compliance Act. Congress passed this Act as part of a job stimulus package, which had another clever acronym, which was the HIRE Act (Hiring Incentives to Restore Employment). Rather than borrow the money to pay for the jobs stimulus, lawmakers believed the taxes they would collect from "wealthy expats" and others would pay for the bill. More on that below.
What Does FATCA Do?
Statistically, most Americans who live overseas do so because their jobs took them there or they married foreign nationals. Yet many of the lawmakers who pushed for FATCA told tales of expatriates who used their smoldering Cuban cigars to burn their delinquent tax notices.
FATCA is an upgrade over the government's old QI (Qualified Intermediary) reporting program, which many pundits claimed was too weak. As proof, they pointed to the UBS imbroglio. In 2001, the Swiss bank obtained QI status; in 2009, UBS agreed to pay some $780 million to settle fraud claims. So, FATCA requires countries to hand over a list of accountholders based on FATCA indications, some of which include:
- Accountholder's place of birth is inside the United States;
- U.S. contact information is listed on the account;
- Bankers have instructions to transfer funds to an American account;
- A U.S. resident who has signature authority or power of attorney.
As of April 2018, over one hundred countries, including notorious tax havens like the Cayman Islands and Switzerland, have signed FATCA agreements with the IRS. Basically, these countries have agreed to turn over account information to U.S. authorities.
Did FATCA raise enough money to pay for the jobs bill? That depends on who you ask. Lawmakers predicted that the bill would mean an additional $800 million a year. However, a Texas A&M University study concluded that the amount was closer to $250 million annually.
Who Must File an FBAR?
In general, people who have overseas bank accounts must file these declarations. Until recently, many foreign banks did not ask too many questions about American account holders. But as mentioned earlier, times have changed. So, if you have money in a foreign account, you really need to file an FBAR if you have signature authority over the account or have a "financial interest" in said account, and the balance of all non-U.S. accounts exceeded $10,000 at any time during the previous tax year.
The penalties for non-filing can be draconian. If the failure to file was not willful, the maximum penalty is $12,921 per violation. If the non-filing is willful, the penalty jumps to $124,588 per violation. This is on top of other penalties that are associated with foreign accounts. The dividing line between willful and non-willful can be quite complicated. If you haven't filed FBARs in the past, you need to sit down with a qualified Offshore Voluntary Disclosure Program tax attorney to help you decide on your options.
For more information on foreign bank accounts and the consequences of unreported foreign income, contact the Brager Tax Law Group.