FBAR and Form 8938 Reporting

By this time, we have it fixated in our brains that the FATCA program is an initiative very useful for eliminating the US Tax evasion by the US citizens that reside offshore. Under FATCA, the US taxpayers are required to inform the IRS of their financial assets that lay outside the United States. This must be communicated via a form provided by IRS, the Form 8938 – Statement of Specified Foreign Financial Assets. If not complied, some serious penalties could be charged on these taxpayers as well. In addition to this, there is another long-run FATCA requirement that involves foreign financial institutions. This means that the taxpayers must inform the US government about all of their accounts held in the foreign banks on FinCEN Form 114, Reporting of Foreign Banks and Financial Accounts (FBAR).

To get a better understanding of these two forms, we must start with the FBAR.

FBAR, commonly known as the Foreign Bank Account Report is associated with a form, the FinCen Form 114, Report of Foreign Banks and Financial Accounts. This would not ask the individuals to pay taxes but would give detailed information of all the foreign accounts held by the US citizens. Since we know that for genuine reasons, an individual might hold foreign financial accounts, there is a set of individuals that use these accounts to hide their money from the tax authorities. Hence, this form has proven to act as a tool for the US government to identify every such account secured by the US citizen, be it for legitimate reasons or for tax evasion.

But should all the account holders fill this form or are there any exceptions? Of course, not everyone comes under the tax-paying barricade and so, only those US citizens who have an ownership or authority of foreign accounts with an aggregate value over $ 10000 at any time during the calendar year are required to fill this FBAR form. This would include having financial interests in or signature authority on the foreign financial account, including a bank account, brokerage account, mutual fund, trust, or another type of foreign financial account, and exceeding certain thresholds. This revelation comes under the Bank Secrecy Act which requires a yearly update to the Department of Treasury. Here, this form of Financial Crime Enforcement Network or FinCEN Form 114, Reporting of Foreign Banks and Financial Accounts (FBAR) is required to be filled.

Primarily it is required for all of these individuals to disclose the foreign bank balance along with certain other disclosures:

• Bank, securities, and financial instruments accounts.
• Accounts held in commingled funds (mutual funds) and an equity interest in the funds.
• Individually owned bonds, notes, stock certificates, and unsecured loans.
• Foreign life insurance or annuities with a cash surrender value.

The IRS has evidently provided a valid list that includes the exceptions from the Reporting Requirements. They need not file an FBAR and the filing exceptions are inclusive of the following United States persons and foreign account holders:

• Certain foreign financial accounts are held jointly by spouses.
• United States persons that are a part in a consolidated FBAR.
• Correspondent/Nostro accounts.
• Foreign financial accounts are owned by any governmental entity.
• Foreign financial accounts are owned by any international financial institution.
• Owners and beneficiaries of US IRAs’.
• Participants and beneficiaries of tax-qualified retirement plans.
• Certain individuals who have a signature authority over, but no financial interest in, a foreign financial account.
• Trust beneficiaries. However, they would be included only if a US person reports the account on an FBAR filed on behalf of the trust.
• Foreign financial accounts that are maintained on a United States military banking facility.