The United States has implemented stringent measures to combat tax evasion and ensure transparency in international financial transactions. Among these measures are the Report of Foreign Bank and Financial Accounts (FBAR) and the Specified Foreign Financial Assets (SFFA) reporting requirements. These requirements oblige U.S. persons with financial interests in foreign accounts to disclose their holdings to the Internal Revenue Service (IRS). This article provides an overview of these requirements and outlines the steps taxpayers must take to remain compliant.
FBAR: Report of Foreign Bank and Financial Accounts
FBAR, or FinCEN Form 114, is a reporting requirement mandated by the Bank Secrecy Act. It requires U.S. persons to report their financial interests in or signature authority over foreign financial accounts if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year. U.S. persons include citizens, residents, and certain entities, such as corporations, partnerships, and limited liability companies.
Foreign financial accounts include bank accounts, brokerage accounts, mutual funds, and other types of financial accounts held at foreign financial institutions. It is important to note that FBAR is a disclosure requirement and does not impose taxes on the reported accounts.
FBAR filing is done electronically through the Financial Crimes Enforcement Network’s (FinCEN) BSA E-Filing System. The deadline for filing FBAR is April 15th of the year following the calendar year being reported, with an automatic extension to October 15th if the initial deadline is missed.
SFFA: Specified Foreign Financial Assets Reporting
In addition to FBAR, U.S. taxpayers may also need to report Specified Foreign Financial Assets (SFFA) on Form 8938, as part of their annual income tax return. This requirement is stipulated by the Foreign Account Tax Compliance Act (FATCA).
SFFA reporting applies to U.S. persons with an interest in specified foreign financial assets that exceed certain thresholds. These thresholds vary based on the taxpayer’s filing status and whether they reside in the United States or abroad. For example, a single taxpayer living in the U.S. must file Form 8938 if the total value of their specified foreign financial assets exceeds $50,000 on the last day of the tax year or $75,000 at any time during the tax year.
Specified foreign financial assets include financial accounts maintained by foreign financial institutions, as well as other foreign financial assets held for investment, such as stocks, bonds, or interests in foreign entities. Unlike FBAR, the SFFA reporting requirement is part of the income tax return and may have tax implications if certain income from these assets is not reported.
Penalties for Noncompliance
Failure to comply with FBAR and SFFA reporting requirements can result in significant penalties. For FBAR, the civil penalty for non-willful violations may reach $12,921 per violation, while willful violations may incur penalties up to the greater of $129,210 or 50% of the account balance at the time of violation. Criminal penalties may also apply in certain cases.
For SFFA reporting, the failure to file Form 8938 can result in a $10,000 penalty, with an additional $10,000 penalty for each 30-day period of non-compliance after receiving IRS notice, up to a maximum of $60,000. Furthermore, underreported income from specified foreign financial assets can trigger a 40% accuracy-related penalty on the underpayment of tax.
Both FBAR and SFFA reporting requirements aim to increase transparency in global financial transactions and combat tax evasion. U.S. taxpayers with interests in foreign financial accounts must be aware of these requirements and their respective thresholds.
This article was written by chat.openai.com and was edited for accuracy by Daniel J. Rohr, CPA/PFS, EA, M.S. Tax.