Confused about the difference between FATCA and FBAR? Don’t get caught in the crossfire of incorrect filings and penalties. As an expat, it’s essential to understand the Foreign Bank Account Report and FATCA Form 8938 – the two most common forms you may need to file if you have money in foreign financial accounts. This blog post will guide you through the basics of FBAR and FATCA, provide tips for ensuring compliance, and highlight common mistakes to avoid.
WHAT IS FBAR, AND WHO IS REQUIRED TO FILE IT?
An FBAR is a report that must be filed with the U.S. Treasury Department by certain U.S. persons who have a financial interest in or signature authority over foreign financial accounts. FBAR stands for “Report of Foreign Bank and Financial Accounts.” The purpose of the FBAR is to help the U.S. government identify and combat money laundering, terrorist financing, and other financial crimes. By requiring U.S. persons to report their foreign financial accounts, the U.S. government can better track the flow of money into and out of the United States.
WHAT IS FBAR REPORTING THRESHOLD?
The threshold for filing an FBAR is generally met if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. However, there are some exceptions and special rules that may apply depending on the specific circumstances.
You’ll be required to file FBAR if all of the following are true:
● You’re a U.S. citizen, permanent resident, or domestic business entity
● You own, control, or have signature authority over a foreign bank account/s and/or other foreign financial accounts.
● The combined value of those foreign financial accounts exceeded $10,000 at any point during the tax year.
On November 2, 2022 the Supreme Court of the United States heard arguments in the Bittner FBAR case. I have previously written about this case here and here. An audio of the oral argument at the Supreme Court (along with commentary) is here. On February 28, 2023 the Court issued it’s ruling.
The issue was whether:
In assessing non-willful civil FBAR penalties the government is restricted to imposing one penalty for failing to file an accurate FBAR form or may the government impose a separate penalty for each mistake related to each account. In other words, is the penalty based on the failure to file a correct form or is a separate penalty allowed for each mistake in relation to the form?
Interestingly and notably the Gorsuch majority decision specifically notes that the period in which the FBAR penalties were assessed were for years that Mr. Bittner was living in Romania. There is no acknowledgment of this in the Barrett dissent!! In addition, Ms. Boyd (of 9th Circuit fame) was also assessed penalties for the years she was living in the UK! To be clear: this decision is very relevant for Americans abroad!!
The court’s decision
On November 2, 2022 the Supreme Court of the United States heard the appeal in the case of:
What 2022 Has Taught Us About FBAR Willfulness
The Bank Secrecy Act requires certain taxpayers to submit timely FBARs to the United States reporting their interests in foreign accounts. If a taxpayer has an FBAR filing requirement and misses it, the taxpayer can be liable for civil penalties of up to 50% of the account balances or $100,000, if the taxpayer is willful. On the other hand, if a taxpayer misses the FBAR filing deadline due to non-willfulness, the civil penalties are limited to $10,000 per violation, subject to reasonable cause.
What is the difference between willfulness and non-willfulness? Good question. Because the concept of willfulness can include recklessness—and the scope of non-willfulness includes negligence and inadvertence—the line between willful and non-willful is not an easy one to define. Accordingly, federal courts have been left to grapple with the distinction.
So far in 2022, federal courts have issued five important cases on willfulness. Each of these is discussed more below.
This is Post 6 in a series of posts describing the historical, statutory and regulatory evolution of Mr. FBAR*
These posts are organized on the page “The Little Red FBAR Book“.
Mr. FBAR Visits The Supreme Court Of The United States!
But, maybe the issue is whether a civil FBAR penalty can be imposed at all instead of how much of a penalty can be imposed?
As a general matter, the FBAR is not a difficult tax form to prepare, at least for most taxpayers and their tax professionals. At its very basics, it merely asks for identifying information regarding the taxpayer and certain basic information regarding foreign accounts held outside the United States. Thus, one would suspect that the failure to timely file this seemingly innocuous information return should not result in significant penalties.
However, tax professionals know better. Under Title 31, a taxpayer’s willful failure to file a timely and accurate FBAR can result in penalties of up to 50% of the foreign account balances, a penalty that can be applied over multiple years. And because federal courts and the IRS view certain reckless behavior as constituting “willfulness,” the bar for willful FBAR penalties can be a seemingly low one.
The law requires each “United States person” who has a financial interest in or signature authority over any foreign financial account to file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. The form required is FinCEN Form 114.
This is one that should be pretty well known by now. The obligation to file a Report of Foreign Bank and Financial Accounts (FBAR) with the US Treasury was initially imposed by the Bank Secrecy Act in 1970. Here are the Instructions to FinCEN Form 114 (FBAR). You can electronically file Form 114 for free here.
What Is a Financial Interest for the FBAR?
Harrington v. Comm’r, T.C. Memo. 2021-95 | July 26, 2021 | Lauber, J. | Dkt. No. 13531-18
Short Summary: Mr. Harrington is a U.S. citizen; his wife is a dual citizen of the United States and Germany. Mr. Harrington sold his house after meeting Mr. John Glube, a Canadian attorney for Eastern Wood Harvesters (EHW). He then provided these proceeds—$350,000—to Mr. Glube, who deposited that amount in a Union Bank of Switzerland (UBS) account under the name of Reed International, Ltd. (the “Reed Account”). At trial, Mr. Harrington testified that he lent this $350,000 as part of his effort to stabilize EHW, a company in which he became an employee. Later, EHW went under due to the European Union banning the import of North American softwood products, products that EHW sold.
What is the Report of Foreign Bank and Financial Accounts (FBAR)?
Congress enacted the statutory basis for the requirement to report foreign bank and financial accounts in 1970 as part of the “Currency and Foreign Transactions Reporting Act of 1970,” which came to be known as the “Bank Secrecy Act” or “BSA.” These anti-money laundering and currency reporting provisions, as amended, were codified at 31 USC 5311 – 5332, excluding section 5315.
The Secretary of the Treasury subsequently delegated the authority to administer civil compliance with Title II of the BSA to the Director of FinCEN. IRS Criminal Investigation (CI), however, maintains authority to enforce the criminal provisions of the BSA.
While FinCEN retains rule-making authority with respect to FBAR reporting, FinCEN redelegated civil FBAR enforcement authority to the IRS.
The FBAR regulations require that a United States person, including a citizen, resident, corporation, partnership, limited liability company, trust and estate, file an FBAR to report:
It has been more than 60 years since the Supreme Court held that, under 28 U.S.C. § 1346(a)(1), taxpayers seeking to file federal tax claims against the government in federal court must pay the full amount of tax prior to filing suit. See Flora v. U.S., 362 U.S. 145, 177 (1960). As a result, many taxpayers with large tax assessments often find it more difficult to obtain judicial review of IRS actions, particularly where important procedural rights are lost due to inaction.
But, by its own terms, 28 U.S.C. § 1346(a)(1) only applies to “internal-revenue taxes” and claims related to “internal-revenue laws.” Clearly, federal income taxes and penalties within Title 26 of the United States Code (i.e., the “I.R.C.”) may fall within these definitions. However, do other statutory provisions outside the I.R.C. also fall within the purview of 28 U.S.C. § 1346(a)(1) and the Flora rule?
Introduction: Looking For Mr. FBAR – Outside Looking In Rather Than Inside Looking Out
FBAR cases are newsworthy. For the last decade blogs and legal journals have been populated by some of the most important FBAR questions of the day.
These questions (most of which are unresolved) include:
– What does willfulness mean in the context of the failure to file an FBAR? What if an individual incorrectly answers the FBAR question on Schedule B?
– What accounts are required to be reported? Gambling accounts? Crypto currency accounts? Gift card balances?
– What does “reasonable cause” mean and when can reasonable cause apply?
– and most recently: Can the Government impose a separate penalty on each unreported account or can only one penalty be reported based on the requirement of one FBAR form?