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FATCA And IRS Reporting Requirements

‘Tis The Season

The U.S. annual tax filing date is coming up. Americans have three weeks until the April 15 deadline. If you’re living outside the United States, you get an automatic two-month extension until June 15. That extension applies both to filing and to paying any taxes due. The latter part is important, as a regular extension (obtained by filing Form 4868) applies only to filing, not to any payment owed. With a Form 4868 (which gives you until Oct. 15 to file), you must include payment to cover 90% of your 2012 tax liability to avoid penalties and interest.

Note further that it’s the IRS forms that you must mail by these dates. The Foreign Bank Account Report (FBAR) is a Treasury Department form, not an IRS form, and comes with its own, separate filing requirements. If you’re meant to file one, your FBAR must be received by the U.S. Treasury Department by June 30…not mailed but received by that date.

Don’t confuse the FBAR with the IRS Form 8938, the relatively new Statement of Specified Foreign Financial Assets. Bank accounts, which generally include brokerage accounts, must be reported on both the FBAR and Form 8938 if you qualify for both (more on this in a minute). Other foreign financial assets go on Form 8938 only. Those other assets would include foreign stocks, gold certificates for gold held offshore, and anything else for which you have a piece of paper showing ownership. The two assets that clearly do not qualify as a Specified Foreign Financial Asset are real estate and physical metals.

Did you know that the United States has something called the Paperwork Reduction Act? Nevertheless, again, you report your bank accounts on the FBAR and then you report them again on Form 8938 (again, assuming you qualify). The IRS does allow you to note on Form 8938 how many companies you’re reporting ownership of stock for by filing Form 5471 or how many foreign trusts you’re reporting by filing form 3520 or 3520-A.

It would seem that the justification for the double reporting has to do with reporting thresholds. The FBAR kicks in when you have aggregate bank account balances of US$10,000 or more at any time during a given year. The rules for Form 8938 are more complicated; however, singles living in the United States are meant to begin reporting on this form if they have foreign financial assets of US$50,000 or more. That number doubles for married couples. If you live outside the United States, the minimum threshold amount for singles is US$200,000, US$400,000 for married couples. Those are year-end values. If, for some reason, the value of your assets was 50% higher than the threshold at any point during the year and then below the threshold amount at the end of the year, you qualify for filing the form as well.

Therefore, it’s quite possible that you are required to file one of these forms but not the other. For example, you could have an offshore trust that has more than US$400,000 of assets in it. If it’s your only “offshore financial asset” and you don’t have signatory authority over any of its bank accounts (which presumably you would not), then you’d only have to file the Form 8938 and mark section four where it asks about “excepted specified foreign financial assets.”

If you have two bank accounts with US$5,000 each in them, then you’d need to file an FBAR, but you wouldn’t qualify for Form 8938.

Let’s say you have one bank account offshore in which you normally keep just a few thousand dollars. During the year, you decide to buy a piece of real estate overseas and, on June 4, you transfer US$150,000 into the account (putting the account balance over US$150k). Then, on June 5, you transfer the money out of the account to close on the property. In this case, you would have to complete both the FBAR and Form 8938, as both thresholds were broken (albeit for a single day).

I think this last scenario is where the IRS is going to snare most people. Most folks won’t file the forms they’re meant to file, either because they’re not aware of the details of the filing rules or because they don’t understand that a single transaction can put them over the reporting limits.

Of course, anyone actively trying to avoid reporting will get snared, as well. The new FATCA rules put in place a system whereby the IRS can reconcile the information provided by taxpayers with the information now required to be filed by “foreign compliant banks.” Fail to report a bank account or a foreign financial asset, and you’ll get hit with penalties that can exceed the value of the asset. Additionally, fail to report a financial asset on Form 8938, and you could end up being taxed on the full sales value when you sell the asset, rather than the capital gain.

Presumably, if you’re not reporting the asset, you have no intention of reporting the gain when you sell it, but that’s a game you probably don’t want to play.

The rules for U.S. citizens who want to do anything with their money outside the United States continue to grow more restrictive and more complicated. Unfortunately, it means the guy who just wants a vacation place in Puerto Vallarta and who has a bank account in Mexico to pay the electric bill to keep the lights on in his beach condo can have a big tax filing obligation that could easily get him into trouble.

Don’t be that guy.

Lief Simon

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