Do I Have to Report Foreign Bank Accounts When I File?

filling up form

In today’s article we are going to discuss the reporting requirements of for foreign accounts held by taxpayers.

There are two different forms that possibly need to be filled out by a taxpayer holding a foreign account. These two different forms have different requirements for who needs file. These two forms are the FATCA Form 8938 and the FBAR form 114 and if a taxpayer meets the requirements with their foreign held accounts, they must file this form on or before April 15th of each year.

These forms each have different filing requirements so I will separately break down in detail when a taxpayer is required to file and to whom each filing needs to be submitted.

It is also very important to know that the filing of one form is not a replacement for the filing of the other. Some taxpayers may only be required to file one, while some may be required to file both forms.

FACTA Requirements (Form 8938)

FACTA or the Foreign Account Tax Compliance Act is a tax law addressing tax noncompliance by US taxpayers with foreign accounts by focusing on the reporting by US taxpayers and foreign financial institutions.

In general, federal law requires US citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts.

In most cases, affected taxpayers need to complete and attach Schedule B to their tax returns. Part 3 of Schedule B asks about the existence of foreign accounts, such as bank and security accounts and generally requires US citizens to report the country in which each account is located.

In addition, certain taxpayers have to complete and attach to their return form 8938 Statement of Special Foreign Financial Assets.

US citizens and certain non-residents as well as certain US corporations, trusts and partnerships who have an interest in foreign financial assets and meet the reporting thresholds are required to file this form with the IRS.

The threshold for qualified Single or Married filing Separately taxpayers living in the US is the value of the assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the year.

The threshold for a married individual filing jointly is a taxpayer who holds an account with the total value of assets of more than $100,000 on the last day of the tax year or more than $150,000 at any time during the year.

The threshold for taxpayers living outside of the United States is different.

A taxpayer filing Single or Married filing Separately and is living outside the US must file this form if the value of the assets was more than $200,000 on the last day of the tax year or more than $300,000 anytime during the year.

A taxpayer that is filing married filing jointly is required to file this form if the value of the assets was more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

This form is attached to your annual return and due by the expat tax filing deadline including any allowable extensions. If not received by the deadline there can be a penalty of up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after the IRS notice of failure to disclose is sent. This penalty holds a maximum penalty of $60,000 and criminal penalties may apply also.

FBAR Requirements (Forms 114)

FBAR refers to Form 114, Report of Foreign and Financial Accounts that must be filed with the Financial Crimes Enforcement Network (FinCen), which is a bureau of the Treasury Department.

FinCen Form 114 is used to report a financial interest or signature authority over a foreign account. The due date for filing the FBAR is April 15. FinCen will grant filers failing to meet the FBAR annual due date of April 15th an automatic six-month extension to October 15th each year.

Generally, an account at a financial institution located outside of the United States is a foreign financial account. If the aggregate value of those foreign financial accounts exceeded $10,000 at any time during the year it must be reported. This is a cumulative amount so if you have two different foreign accounts with a combined account balance greater than $10,000 at any one time during the year, you will need to report both accounts.

There are certain accounts or certain situations when a FBAR filing is not required.

  • Correspondent/Nostro accounts,
  • Owned by a governmental entity,
  • Owned by an international financial institution,
  • Maintained on a United States military banking facility,
  • Held in an individual retirement account (IRA) you own or are beneficiary of,
  • Held in a retirement plan of which you’re a participant or beneficiary, or
  • Part of a trust of which you’re a beneficiary, if a U.S. person (trust, trustee of the trust or agent of the trust) files an FBAR reporting these accounts.

You don’t need to file an FBAR for the calendar year if:

  • All your foreign financial accounts are reported on a consolidated FBAR.
  • All your foreign financial accounts are jointly-owned with your spouse and:
  • You completed and signed FinCEN Form 114a authorizing your spouse to file on your behalf, and your spouse reports the jointly-owned accounts on a timely-filed, signed FBAR.

It is very important to remember that this form is not filed with your return and is not submitted to the IRS.

You must file the FBAR electronically through the Financial Crimes Enforcement Network BSA E-Filing System.

using laptop

If you do not want to e-file then you must contact FinCen to request an exemption from e-filing. If they approve you then they will send you the paper FBAR form to complete and mail to the IRS at the address in the form’s instructions.

Married taxpayers are able to file a single FBAR with their spouse only if either none or only one of you own a separate account. Otherwise each spouse must file their own form.

If you are required to file, the FBAR and fail to do so on time or if you do not correctly report your foreign accounts you can be subject to a penalty of up to $10,000.

If you knowingly fail to file, meaning you were fully aware of your requirement and you failed to do so you could get hit with a penalty up to $100,000 per violation or even higher depending on your account balances at the time of the violation.

Persons required to file an FBAR must retain records that contain the name in which each account is maintained, the number of other designations of the account, the name and address of the foreign financial institution that maintains the account, the type of account, and the maximum account value of each account during the reporting period.

These records must be retained for a period of 5 years from April 15th of the year following the calendar year reported and must be available for inspection as provided by law.

How does the IRS & FinCen Catch Avoiders?

The Foreign Account Tax Compliance Act also obliges foreign banks to report their American account holders to the IRS including their bank balance.

As of June 2016 197,000, foreign financial institutions were signed up to comply.

This means that the IRS knows about more or less all American financial and bank accounts abroad, including their balances, along with the name and address of their account holders. The IRS can now simply cross reference this data with FBAR filing data. Much like the way they seek out taxpayers for unreported income.

Streamlined Filing Compliance Procedures

Filing an FBAR late or not at all is a violation and may subject you to penalties.  If you have not been contacted by IRS about a late FBAR and are not under civil or criminal investigation by IRS, you may file late FBARs and, to keep potential penalties to a minimum, should do so as soon as possible.  To keep potential penalties to a minimum, you should file late FBARs as soon as possible. If you were truly not aware of your filing obligations, there is a voluntary disclosure program that can possibly help you catch up with your filing and possibly pay any back taxes owed without penalty.

In conclusion it is very important that all foreign accounts are reported to the IRS and the Financial Crimes Enforcement Network. If you do not understand the requirements or how to file then you should seek the advice of a true tax professional.

Enrolled Agents and CPA’s have the licensing and knowledge to properly advise you. If you have failed to file these forms and meet the requirements for either the FBAR or FACTA and have further questions or are ready to fix your situation contact us for a free tax consultation.

Let’s see how we can help you resolve your situation so you can stop worrying about the IRS.

Foreign-Earned Income Taxation

This is a question that comes up a lot with clients that work outside of the country either during portions of the year or are full-time residents of other countries. Estimates suggest that there are around 8 million US citizens living in other countries around the world. 

Some American citizens are there for employment and financial reasons, others are retired, while some may be born in these foreign countries, but they are the children of US citizens.  All these people are most likely required to file a US tax return every year.

The United States tax system is incredibly unique in that it is a citizenship-based tax system. With this system, it does not matter where in the world you live, if you are a US citizen you are required to file taxes by June 15th of each year. There are tax treaties in place with some countries so many citizens living abroad file their taxes and owe nothing. 

Whether you owe taxes or not all US citizens are required to file their tax returns if they have earned income over the minimum thresholds. With others that are living in foreign countries, they find themselves in a situation of double taxation. This is when you must pay taxes in the US because of your citizenship, and you are also required to pay taxes in the country where they are living. 

 

Foreign Earned Income Exclusion

This article will discuss a remedy to the possibility of double taxation. A lot of these taxpayers may qualify for the Foreign Earned Income Exclusion.  This is where a portion of your foreign earned income can be excluded from US taxation.

In 2020 the allowable exclusion cannot be more than the smaller of the following:

  • $107,600 for Single filers or if Married Filing Jointly it can be $107,600 for each spouse if they both qualify and meet the requirements.
  • Foreign earned income for the tax year minus the amount of foreign housing exclusion or housing deduction if taken.

 

How Do I Qualify?

This exclusion is the most common and widely used tax benefit for US citizens living abroad.  It allows Americans to exclude all or a portion of their foreign earned income from their US taxes. With such great benefit, this is not a blanket exclusion for all foreign earned income. There are some specific qualifiers that you must meet. 

The requirements to file minimum income thresholds are the same as for US residents. For Tax year 2020 the thresholds for total yearly income as laid out below as seen on the American Citizens Abroad website.

Minimum Income Requirements for Filing Foreign Earned Income

Marital StatusUnder 6565 or Older
 You are single (unmarried) $12,400 $14,050
You are married filing jointly $24,800 $27,400 (both over 65)
 You are married filing separately $5 $5
 You are filing as “Head of household” $18,650 $20,300
 You are a widow or widower $24,800 $26,100

 

Foreign earned income means wages, salaries, professional fees, or other amounts paid to you for personal services rendered by you. It does not include amounts received for personal services provided to a corporation that represent a distribution of earnings and profits rather than reasonable compensation. 

A qualifying individual may claim the foreign earned income exclusion on foreign earned self-employment income. The excluded amount will reduce your regular income tax but will not reduce your self-employment tax.

There are some forms of income that do not qualify for the exclusion such as:

  • Pay received as a military or civilian employee of the US government or any of its agencies.
  • Pay for services conducted in international water or airspace (not a foreign country)
  • Payments received after the end of the tax year following the year in which the services that earned the income were performed.
  • Pay otherwise excludable from income, such as the value of meals and lodging furnished for the convenience of your employer on the premises.
  • Pension or annuity payments including social security benefits

To claim the foreign earned income exclusion a taxpayer must meet all three of the following requirements:

  1. Their tax home must be in a foreign country. A tax home is a place where a taxpayer permanently or indefinitely engages to work as an employee or self-employed individual. A tax home is not in a foreign country for any period in which a taxpayer’s abode is in the United States. An abode is one’s home, habitation, residence, domicile, or place of dwelling.
  2. The Taxpayer must have foreign earned income.
  3. The Taxpayer must meet either the Bona Fide Residence Test or the Physical Presence Test.

Bona Fide Resident Test

A taxpayer does not automatically acquire bone fide resident’s status merely by living in a foreign country for one year. The length of the stay and nature of the job are additional factors that determine whether a taxpayer meets the test. 

A taxpayer who travels to a foreign country to work on a particular construction job for a specified period of time ordinarily is not a bona fide resident of that country even if working there for more than one tax year.

To be a bona fide resident a taxpayer must be:

A US citizen who is a resident of a freeing country or country for an uninterrupted period that includes an entire tax year.

or

A US resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or country for an uninterrupted period that includes an entire tax year.

Physical Presence Test

A US citizen or a US resident alien physically present in a foreign country or country for at least 330 full days during any period of 12 consecutive months. 

The physical presence test is based only on how long the taxpayer is in a foreign country. The test does not depend on the kind of residence established, intentions about returning, or the nature and purpose of the stay abroad.

 

How to File for the Foreign Earned Income Exclusion?

If you qualify for the foreign earned income exclusion, then you must submit a Form 2555 with your Form 1040 or 1040x. Do not submit this form by itself. Form 2555 shows how you qualify for the bona fide residence test or the physical presence test, how much of your foreign earned income is excluded and how to figure out the amount of your allowable foreign housing exclusion or deduction. 

If you and your spouse both qualify to claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you and your spouse must file separate 2555 Forms to claim these benefits.

 

What if I do not qualify for the Foreign Earned Income Exclusion?

If you do not meet these requirements for the exclusion, it is not the end of the road. It does not mean you will have to pay tax on all your income. 

Another option is the Foreign Tax Credit. The foreign tax credit is a non-refundable tax credit for income taxes paid to a foreign government because of foreign income tax withholdings. The foreign tax credit is available to anyone who either works in a foreign country or has investment income from a foreign source. Generally, only income, war profits, and excess profit taxes qualify for this credit. You can not claim the foreign tax credit on the same income.

Another option for a US citizen living abroad is the Foreign Housing Exclusion. This deduction was created by the IRS to offset the expenses that go hand in hand with living overseas, this exclusion decreases a taxpayer’s tax liability by allowing certain housing expenses to be deducted from taxable income. This exclusion can be used if your housing costs were over 16% of the FEIE amount for that year. If you live in a city that is identified by the IRS as ultra-high cost, you may be able to use an additional amount for the foreign housing exclusion.

In conclusion, if you had not realized that as a citizen you are still required to file a Federal Tax Return it is not too late to take advantage of the exclusion if you qualify. To take this exclusion you generally must file within one year of the due date of your return or by amending a timely filed return. However, if the IRS has not discovered your failure to file or if you owe no tax after taking the exclusion you may still be able to exclude your foreign earned income from your US taxes. 

As we have recommended in many other articles, any time you are dealing with these more complex filings it is smart to hire a true tax professional who has the education and licensing to take advantage of everything within tax law that can save you money. In a situation like this, an Enrolled Agent or a CPA is a trusted source that you can turn to.