This is the third installment of our series covering the differences between FBAR and FATCA reporting for US taxpayers.
FBAR and FATCA FAQs #11-20
11. Can I file a joint FBAR with my spouse?
Yes. But there are conditions.
Married couples can file a joint FBAR to report both spouses’ accounts as long as the only accounts they own are joint accounts. To the extent that they have separate accounts, or accounts with signature or other authority, only one of the two spouses have have accounts in either one of those categories. If both spouses have separate accounts, each spouse is required to file their own FBAR. In they are required to file separate FBARs, both spouses need to report their separate accounts and their joint accounts.
12. Do I report 50% of the balance in joint accounts?
No. On both the FBAR Form FinCEN 114 and on Form 8938, 100% of the highest balance of your joint accounts must be reported, even if the account is reported by each spouse in their separate FBAR. Do not worry, the IRS is not going to think that you own twice the balance because the joint account is reported twice.
13. Can I file a separate Form 8938 from my spouse?
Form 8938 is part of the tax return. Spouses filing a joint tax return also file a joint Form 8938, even if all the accounts are owned by just one of the spouses, are the other spouse owns nothing.
Spouses filing separate tax returns file their own Form 8938 with their separate tax return. A lower Form 8938 filing threshold applies to spouses filing separately, as explained in FAQ. 4 in CBP No. 28.
14. What happens if I don’t file an FBAR when I should?
Failure to file the FBAR carries onerous penalties. FBAR penalties are found in Section 5321 of Title 31 of the U.S. Code and are adjusted by inflation annually. The IRS publishes the maximum civil penalties on their website and updates them every year. In 2020, the maximum penalties are:
13. Can I file a separate Form 8938 from my spouse?
Form 8938 is part of the tax return. Spouses filing a joint tax return also file a joint Form 8938, even if all the accounts are owned by just one of the spouses, are the other spouse owns nothing.
Spouses filing separate tax returns file their own Form 8938 with their separate tax return. A lower Form 8938 filing threshold applies to spouses filing separately, as explained in FAQ. 4 in CBP No. 28.
14. What happens if I don’t file an FBAR when I should?
Failure to file the FBAR carries onerous penalties. FBAR penalties are found in Section 5321 of Title 31 of the U.S. Code and are adjusted by inflation annually. The IRS publishes the maximum civil penalties on their website and updates them every year. In 2020, the maximum penalties are:
15. What are the penalties for failure to file Form 8938?
These penalties can be pretty spicy also.
Form 8938 is subject to a civil failure to file penalty of $10,000. This penalty can be assessed AUTOMATICALLY if the form should have been filed and it isn’t. It can also be increased by $10,000 per month if the non-compliance continues for more than 90 days once the IRS assesses the initial failure to file penalty. Luckily, this additional penalty is capped at $50,000.
On top of this, not including Form 8938 in a tax return leaves the taxpayer exposed to the possibility of IRS examination indefinitely. Generally, the IRS has three years from the time a tax return is filed to examine the tax return and assess additional tax. The three years, however, DO NOT START running if the tax return is considered substantially incomplete.
A substantially incomplete tax return is the same as a tax return that has not been filed. A tax return that is missing Form 8938 when required, will be, you guessed it, considered substantially incomplete. Yikes! For more detail, refer to IRC § 6501(c)(8)(A).
16. But how will the IRS even know???
The million dollar question! Or better said, the question that would have made me a million dollars if I received a penny every time I heard it.
Remember how we said earlier that FATCA imposed reporting requirements on foreign financial institutions, not just on US individuals? Well, that’s how they know.
FATCA is the law that creates the mechanism that allows the IRS to know. The exchange of information between foreign financial institutions and the IRS is annual and it is automatic. Every year, foreign financial institutions with US accounts, i.e., accounts with US owners, need to report those accounts to the IRS through the International Data Exchange.
How does the foreign financial institution know that you are a US person and therefore that your account is a reportable US account for FATCA purposes? They are required to ask you. They ask you when you open the account, or they may ask you when they realize they forgot to ask you when you opened the account. And when you tell them that you are a US person (when asked, I urge you to please respond to this question truthfully), they will ask you to complete Form W-9 to provide them the information that they need to report your ownership of the account to the IRS.
17. What can I do if I have not filed FBARs when I should have?
The IRS offers several different programs to rectify FBAR reporting errors or omissions. We will cover these programs in detail in future issues of CBP, as each one of these programs deserves its own dedicated entry. For now, you can use the link at the end of this paragraph to learn about the program that specifically applies to FBAR compliance issues: The Delinquent FBAR Submission Procedures.
18. What can I do if I have not filed a required Form 8938?
As we mentioned earlier in this series, Form 8938 is an international information return. The IRS program aimed at rectifying reporting issues related to international information returns is the Delinquent International Information Return Submission Procedures. These procedures allow taxpayers who qualify to file under the program to fix their Form 8938 reporting errors without having to pay any penalties. No penalty. A freebee!
This program, like the one above for the FBAR, by waiving all related penalties, amounts to a get-out-of-jail-free card for the non-compliant filer. As you might imagine, such generosity comes with certain conditions. It is not available to anyone and everyone. Some of these conditions include having reported all related income and paid the resulting tax, and having reasonable cause for the errors or omissions.
19. But what if I have unreported income related to those foreign financial assets and I don’t have “reasonable cause”?
In this case, neither one of the two programs above are available to you.
But, as long as your non-compliance is non-willful, there is yet another program that can be used to report missing income, pay the related tax, and fix any foreign account reporting omissions or errors. This program is the Streamlined Filing Submission Procedures.
The Streamlined Filing Submission Procedures, SFOP or SFDP, aka Streamlined Offshore (for taxpayers abroad) and Streamlined Domestic (for taxpayers in the USA), is the most commonly used IRS offshore compliance program.
SFOP/SFDP probably deserves its own CBP series. There is plenty to write about this program, starting with what constitutes non-willfulness, who is a taxpayer abroad and who is a domestic taxpayer and a slew of other nuances. If you are interested in practical tips about this program, shoot me an email to let me know. If there is enough interest, I will add the topic to the CBP topic list.
20. What can I do if I knew I had to file these forms, but I hid my head in the sand and didn’t do it? Am I going to jail if I get caught?
Jail? Extremely unlikely.
Penalties though? Tough spot.
The IRS used to have an Offshore Voluntary Disclosure Program for these types of situations, but the program run for nine years and was closed in September 2018. The option of filing amended or late tax returns, to come clean and to pay all related tax, penalties and interest BEFORE the IRS catches you, is always available. The issue with this option, typically, is that with offshore reporting penalties being so high, a lot of people feel they can’t afford to take this approach.
I believe that people should be able to make their own decisions, but this may be one of those situations in which, going back to the commonsense approach thread in this letter, consulting a professional for advice, like an international tax attorney experienced in offshore non-compliance, may be the right answer. It’s such a tricky of a situation to try to wing it. The consequences could be financially crippling. Professionals exist for a reason, and the right professional can provide a lot of value in a situation like this. You may want to play your more pricey get-out-of-jail card with this one.
All right folks, we’ve covered the last ten of the top 20 Frequently Asked Questions about FBAR and FATCA. I can leave you now, as unofficial FBAR and FATCA experts.
See you again next week to continue talking taxes. Be safe!
Un abrazo y buena onda,
Marina