Every year, Americans who have relocated abroad find themselves perplexed. Everyone can experience stress during tax season, and for foreigners, matters only become more challenging. Also, it is difficult to navigate the alphabet soup of FATCAs, FBARs, and FinCENs. Need not to worry. We’re here to help in making sense of everything. The FBAR and Form 8938 are two frequently used forms for Americans living abroad that will be covered in this article. Although these two types are similar, they nevertheless differ in some important ways.
What is Form FBAR
Americans must submit FinCEN Form 114, often known as a Foreign Bank Account Report, if they have $10,000 deposited in one or more non-US bank accounts (FBAR). In order to prevent tax evasion, the FBAR was created to make it more difficult for US citizens to conceal funds in foreign accounts.
Since 1970, FBAR reporting regulations have been in force. Unfortunately, the Foreign Account Tax Compliance Act wasn’t passed until 2010, making those regulations enforceable (FATCA). Almost all international banks are required under FATCA to share information about any account holders who are US citizens. That means that the IRS is usually aware of the foreigners who are neglecting to submit their FBARs on time. People who avoid paying their taxes won’t be able to do so for very long.
You could incur heavy fines if the IRS contacts you about your failure to submit an FBAR. The FBAR is only an informative tax form, which is excellent news. The money that expats keep in a foreign bank account is not immediately taxed. For the sake of transparency, you need just inform the IRS about it.
In other words, reporting an FBAR when required won’t cost you anything, but refusing to do so could cost you a lot. It’s best to file at all times.
Understanding of Form 8938
Form 8938, used to disclose foreign assets, is an informational form just like the FBAR. These assets consist of:
- Brokerage accounts
- Foreign financial instruments
- Bank accounts
- Stock or securities of foreign issuers
- Annuity contracts with cash value
- Foreign-issued life insurance
- Shares in foreign hedge funds and private equity funds
The FBAR and Form 8938 are comparable, and many expats believe them to be the same. They do have diverse forms, though, and it’s critical to recognize them.
To begin with, the IRS, not Finsen, is responsible for issuing Form 8938. The FBAR is less intricate and sophisticated than Form 8938.
Even more complicated are the Form 8938’s reporting obligations. While the reporting requirements for Form 8938 differ depending on your residency and filing status, the FBAR is applicable to any taxpayer who has at least $10,000 stashed away in a foreign bank account.
The prerequisites for submitting Form 8938 for the following individuals residing in the US are:
- If you are Single or Married and Filing Separately:- Your total foreign asset value must be larger than $50,000 on the last day of the tax year or more than $75,000 at any time throughout the year.
- If you and your Spouse are Married and Filing Jointly:- Your total foreign asset value must be larger than $100,000 on the last day of the tax year or more than $150,000 at any time throughout the year.
The requirements for submitting Form 8938 for particular individuals who reside abroad are:
- If you are Single or Married and Filing Separately:- Your total foreign asset value must be larger than $200,000 on the last day of the tax year or more than $300,000 at any time throughout the year.
- Married Couples Filing Joint Tax Returns:- You and your spouse’s combined foreign asset value exceeds $400,000 on the last day of the tax year or $600,000 at any time throughout the year.
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Difference: Form 8938 vs. FBAR
Indeed, there are differences between the FBAR and Form 8938. Although it may appear that both forms are requesting the same data, there are some subtle—and not so subtle—differences that every taxpayer has to be aware of. You are not necessarily needed to file the other form if you are only required to file one.
Many expats are required to submit both a Form 8938 and an FBAR. Others are merely needed to submit an FBAR. Some people might not even be required to file.
We’ve created a table below that contrasts the FBAR with Form 8938 to assist you better grasp their distinctions.
|Who and all need to file?||Specified individuals (US citizens, resident aliens, and certain non-resident aliens) and domestic entities that have an interest in specified foreign financial assets and meet the reporting threshold.||US persons (US citizens, resident aliens, trusts, and estates) that have an interest in foreign financial accounts and meet the reporting threshold.|
|Reporting threshold||Reporting thresholds vary by residency and filing status. (See above for more.)||The aggregate value of all foreign financial accounts exceeds $10,000.|
|What is reported?||The maximum value of the specified foreign financial asset.||The maximum value of the foreign financial account.|
|Who is the form due?||The form is due with your federal tax return, including extensions.||The form is due April 15, with an automatic extension to October 15 available.|
|How is it filled?||With your federal income tax return.||Filed electronically through Finsen’s BSA E-Filing System.|
|Penalties||Up to $10,000 for failure to disclose and an additional $10,000 for every 30-day period of non-filing up to a potential maximum penalty of $60,000. Criminal penalties may also apply.||Up to $10,000 per violation for non-willful failure to file. If your failure to file is considered willful, the fine can be $100,000 or 50% of the balance of the account at the time of the violation, whichever is greater. Criminal penalties may also apply.|
While assessing your filing responsibility for each form, keep in mind that not all accounts and/or financial assets need to be taken into account. It is not required to report a financial asset that is reported on Form 8938 (FATCA) on your FBAR form and vice versa.
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When determining your commitment, take into account the factors listed in the table below for each.
|Financial accounts with a foreign financial institution||YES||YES|
|Financial accounts kept at a US bank’s foreign branch||NO||YES|
|Financial accounts kept at a foreign bank’s US branch||NO||NO|
|Foreign bank account on which you have the right to sign||No, unless you have a stake in the above-described account.||YES|
|Stock held in a foreign brokerage account||The stock in the account does not have to be reported separately even though the account is reportable.||The stock in the account does not have to be reported separately even though the account is reportable.|
|Kept outside of a foreign brokerage account: foreign stock||YES||NO|
|Interests in foreign partnerships||YES||NO|
|Mutual funds operating foreign||YES||YES|
|Domestic mutual funds that invest in foreign stock||NO||NO|
|Investments held in foreign or domestic grantor trusts where you are the grantor, whether they are kept in foreign accounts or non-account investments||YES for both||YES for foreign accounts|
|A cash-valued life insurance policy or annuity issued foreign||YES||YES|
|Foreign hedge and private equity funds||YES||NO|
|Foreign real estate held directly||NO||NO|
|Foreign real estate held through a foreign entity||No, however the foreign entity is a designated foreign financial asset, and it’s worth will include the value of the real estate||NO|
|Foreign currency held directly||NO||NO|
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FILING CRITERIA FOR THOSE WITH FOREIGN ASSETS
Persons and Entities: U.S. citizens, U.S. residents, specific residents of U.S. territories, and nonresidents choosing to be treated as U.S. residents are required to complete this form if they possess financial accounts or particular investment assets (referred to as “specified individuals”).
Regarding businesses, Form 8938 must be submitted by entities categorized as “specified domestic entities.” A “specified domestic entity” is legally defined as a “domestic corporation, domestic partnership, or trust as described in section 7701(a)(30)(E) of the tax code, if the said corporation, partnership, or trust is established or utilized with the intent of directly or indirectly holding determined foreign financial assets.”
This definition is outlined in 26 CFR § 1.6038D-6. Also, closely held domestic companies and partnerships meeting the criteria of deriving 50 percent or more of their gross income from passive sources or having 50 percent or more of their assets generating passive income (or held for passive income generation) are evaluated as defined domestic entities.
Additional details can be found in the Instructions for Form 8938 (2020), under the section “Specified Domestic Entity.” Passive income encompasses dividends, interest, interest-like income, annuities, and other similar earnings. For a recommended list of what qualifies as passive income, refer to the teachings accompanying Form 8938.
Specified Foreign Financial Assets
Designated foreign financial assets comprise financial accounts held at international financial establishments and specific foreign financial assets retained for investment purposes, distinct from assets kept within financial establishment accounts. Included within these foreign financial assets are stakes in overseas entities, stocks or securities issued by people or entities outside the United States, financial mechanisms or agreements in which a non-U.S. entity takes on the role of issuer or counterparty, stocks published by foreign corporations, and ownership interests in foreign trusts or estates.
Further illustrations surround diverse types of debt developed by foreign entities and ownership stakes in foreign partnerships.
WHAT’S THE PENALTY FOR NOT FILING FORM 8938 AND FBAR ?
Failure to file FBAR can result in civil penalties, criminal penalties, or a combination of both. If the violation is non-willful, a civil penalty of $10,000 is imposed. In cases of willful violations, the penalty could exceed $100,000 or 50% of the account balance during the time of the violation, whichever is higher.
For not submitting Form 8938, a penalty of $10,000 is levied if the form is not filed by the deadline or if it’s inaccurately completed. Further penalties of up to $50,000 may be added if the taxpayer doesn’t respond to the IRS Notice within 90 days.
Well, this is how Form 8938 is different from Form FBAR. It is hoped that the above information will helpful for you in finding what the Difference between Forms 8938 is and FBAR. In case, if any questions are still unanswered, feel free to connect our Helpdesk Team for quick or precise assistance ReconcileBooks.
Frequently Asked Questions
What are the Common Issues with FBAR Forms?
It’s common for people to be unaware of and/or misunderstand the entire scope of all FBAR regulations due to the complexity of the subject. It’s a lot to process, and managing your finances when they are dispersed among several different nations is challenging. You should brush up on the basics of FBAR before delving into the world of delinquent FBAR forms.
The two most typical errors on FBAR filings are as follows:
- The $10,000 restriction is cumulative across all of your overseas accounts, not per account.
- Further subject to disclosure are pension plans, inherited funds, and life insurance policies.
What Happens if you Don’t File Form FBAR on Time?
Whether the IRS considers your error to be willful or unintentional will affect the severity of the penalties associated with failing to file an FBAR. There’s less of a possibility that you’ll be punished if you can demonstrate that filing late FBAR paperwork wasn’t willful and you have evidence to back up your claim.
How Willfulness is Determined to File an FBAR?
Your willfulness will rely on a number of factors, including:
- Correspondence with foreign financial institutions
- Business history
- Bank statements
- Previous tax returns
- Interviews with the entity preparing your tax returns
- Previous correspondence with the IRS
The IRS has the burden of demonstrating willfulness. To ascertain whether your acts were deliberate, they will examine as much information as they can.
It’s crucial to remember that if the IRS determines you were intentionally ignorant of the need to file an FBAR, they may view you as guilty.
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