U.S. citizens living outside of the country may have additional filing obligations thanks to the Foreign Account Tax Compliance Act
For U.S. citizens and green card holders living outside of the United States, the deadline for filing their U.S. taxes or requesting an extension was June 15. But like most things related to U.S. taxes, it is not that simple. There are additional filing requirements related to foreign assets and financial accounts that also need to be considered.
As one of the ways to fight money laundering, U.S. citizens and green card holders are required to report all non-U.S. financial accounts that they have a financial interest in or signing authority on. This includes things like bank accounts, brokerage accounts, mutual funds, trusts, life insurance policies and retirement plans.
If a U.S. citizen has an aggregate $10,000 USD or more located in accounts outside of the country, they are required to report all of their holdings on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Even if your accounts only totalled $10,000 USD for a day during the year or if only one account met the $10,000 USD threshold, you are still required to report the highest value of all of your financial accounts on an FBAR.
When valuing and reporting your accounts for FBAR, you must use the U.S. Treasury's year end exchange rate to convert to US dollars regardless of the date on which the highest value was attained.
The FBAR forms are due on June 30 and must be filed electronically. For 2015, there are no extensions granted for FBAR filing but the due date will move to April 15 next year and you will be able to file an extension.
The penalties for a late FBAR can be substantial. If you fail to file, fines can be up to $10,000 USD per year, with a six year statute of limitations. If the IRS decides that you have willfully failed to file or report your accounts, the penalties are the greater of $100,000 USD or 50 per cent of the account balances. And this is before they look at potential criminal penalties.
Now with FATCA in full effect, there is Form 8938, Statement of Specified Foreign Financial Assets to report foreign held assets. FATCA is meant to target taxpayers with assets held inside and outside of financial accounts. It has a broader scope and higher threshold than FBAR. And even though you may have reported all of your accounts on your FBAR, Form 8938 must include those accounts again as well as a few more types of assets.
For U.S. citizens living abroad, you need to file Form 8938 if your foreign held assets totalled $200,000 USD or more on the last day of the tax year or if your assets totalled more than $300,000 USD at any point during the tax year. Married individuals filing jointly have higher thresholds of $400,000 USD and $600,000 USD.
You need to determine the highest value in U.S. dollars for each account and asset reported using the end of year exchange rate posted by the U.S. Treasury with some exceptions. Form 8938 is filed with your tax return and due the same day.
The penalties for failure to file Form 8938 are also quite substantial. You can be fined up to $10,000 USD for failure to disclose accounts and assets that should be reported. You could also be hit with an additional $10,000 USD for each 30 days of non-filing after the IRS notifies you that you need to file, up to a maximum of $60,000 USD. The statute of limitations begins only when the form is filed so the IRS can assess tax and penalties for up to three years after you finally file it. Criminal, accuracy and fraud penalties may also be part of the equation.
Neither the FBAR nor Form 8938 results in a taxpayer owing more money. The forms are meant to track foreign assets to ensure taxpayers are not hiding money they should be paying tax on. And while they may seem somewhat redundant, there are important differences in the reporting requirements and they do go to different branches in the government.
Both forms include accounts that are tax-deferred in Canada such as Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs). However, Form 8938 exempts certain assets such as mutual funds if you filed Form 8621 or Tax Free Savings Accounts (TFSAs) if you have been filing Form 3520. Investments not held in an account such as paper stock certificates must be reported on Form 8938 but not on the FBAR.
If you have U.S. tax filing obligations, make sure you understand what you should be filing and the deadline. Penalties can be assessed for each year you fail to file so it can add up quickly. It will pay to keep good records of your investments and assets throughout the year so you have the information handy when it comes time to complete the appropriate forms.