Keeping track of all the taxes you have to file as a US person can be hard, but it can be even more difficult to file for taxes when you’re a US person with non-US (foreign) accounts. Beyond knowing you general tax obligations and responsibilities as a taxpayer, you need to know exactly what tax paperwork to file and when.
Some of the big tax compliances that apply to U.S. people who hold accounts outside the country include the Foreign Account Tax Compliance Act (FATCA) rules and the Foreign Bank Account Report (FBAR) rules. However, there is often a lot of confusion surrounding these two rules. And if you are a U.S. expat or run a foreign financial institution that holds accounts for U.S. people, knowing these differences will be to your benefit.
Getting to know the FATCA legislation
The FATCA legislation was passed as part of the HIRE Act and has to do with a series of legislative changes that the U.S. government has made over the last 10 years.
These legislative changes require that financial institutions that are based outside the U.S. but hold accounts for U.S. persons provide information concerning those accounts. This ensures that the U.S. government can try to collect more tax revenue on income streams that are linked to accounts outside the country.
In this context, U.S. persons are more than just individual taxpayers. The internal revenue service (IRS) describes a “U.S. person” as follows:
- A citizen or resident of the United States
- A domestic partnership
- A domestic corporation
- Any estate other than a foreign estate
- Any trust in which a court within the United States can exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust.
- Any other person that is not a foreign person
The FATCA rules were essentially developed to prevent tax evasion by U.S. persons with offshore financial assets and accounts.
Part of the FATCA legislation requires that banks and brokerage firms outside the U.S. provide FATCA reports to the U.S. Treasury Department each year. These reports should confirm the balances held in those accounts for the U.S. people in question.
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Understanding the FBAR requirements
According to the IRS, the HIRE Act also contained “legislation requiring U.S. persons to report, depending on the value, their foreign financial accounts and foreign assets.” Separate from FATCA legislation, there is the Report of Foreign Bank and Financial Accounts (FBAR), which has its own set of requirements.
The FBAR is the report that each U.S. person files with the U.S. Treasury Department to indicate the highest balances in their non-U.S. accounts each year. The eligibility to file these reports is determined by several factors. To file an FBAR, you must be a U.S. person or corporation with foreign financial accounts whose aggregate value is above $10,000 during the reportable year.
U.S. taxpayers who do not provide the necessary reports or incur violations can be penalized by the IRS. Penalties can be either criminal or civil (monetary), depending on the offence. According to the IRS, “assertion of penalties depends on facts and circumstances.”
The main difference between FATCA and FBAR filing is that the former is primarily filed by financial institutions whereas the FBAR report is filed by individuals.
Ultimately, the plan would be that the IRS will have software in place to match these two reports over the long term. So, they will have the FATCA reports from the financial institutions and the FBAR reports from the U.S. persons with offshore accounts.
In theory, these two reports should have the same information, just from different sources. If they have contradicting information, then that would be an opportunity for the IRS to send a notice and ask the U.S. taxpayer to explain. The IRS would also have the opportunity to charge additional tax on income linked to those accounts, depending on the discrepancy in the two reports.
There will probably be more scrutiny of the FATCA and FBAR forms in the future, as the Treasury Department gets more and more sophisticated software to match those reports. Sophisticated software would also enable the Treasury Department to try and collect more U.S. tax revenue.
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