In the realm of international tax compliance, understanding the nuances between Form 8938 and FBAR (Foreign Bank Account Report) is crucial.
Both forms serve to report foreign financial assets, but they have distinct requirements and serve different purposes. This article aims to clarify the differences between these two forms, ensuring you stay compliant and avoid hefty penalties.
What is Form 8938?
Form 8938, also known as the “Statement of Specified Foreign Financial Assets,” is required by the IRS to report certain foreign financial assets.
This form is a part of the Foreign Account Tax Compliance Act (FATCA). It is designed to improve tax compliance involving foreign financial assets and offshore accounts.
Filing Requirements and Thresholds
Individuals must file Form 8938 if their specified foreign financial assets exceed certain thresholds.
For single taxpayers living in the U.S., the threshold is $50,000 on the last day of the tax year or $75,000 at any time during the year. For married taxpayers filing jointly, these thresholds double.
Due Dates and Submission Process
The due date for Form 8938 is the same as your federal income tax return, including extensions. The form is filed with your annual tax return, and failure to comply can result in severe penalties.
Potential Penalties for Non-Compliance
Failure to file Form 8938 can result in a $10,000 penalty, with additional penalties of up to $50,000 for continued failure after IRS notification. There are also accuracy-related penalties of 40% on understatements of income related to undisclosed foreign financial assets.
What is FBAR?
FBAR, or the Report of Foreign Bank and Financial Accounts, is a separate filing requirement under the Bank Secrecy Act. It requires U.S. persons to report foreign bank accounts if the aggregate value exceeds $10,000 at any time during the calendar year.
Filing Requirements and Thresholds
The threshold for FBAR is straightforward: if the combined value of all foreign financial accounts exceeds $10,000 at any point during the year, you must file an FBAR. This requirement applies to individuals, trusts, estates, and business entities.
Due Dates and Submission Process
The FBAR must be filed electronically through the Financial Crimes Enforcement Network (FinCEN) by April 15, with an automatic extension to October 15 if needed.
Potential Penalties for Non-Compliance
Non-compliance with FBAR can result in hefty penalties. Civil penalties for non-willful violations can reach $10,000 per violation.
For willful violations, penalties can be the greater of $100,000 or 50% of the account balance. Criminal penalties may also apply.
Key Differences Between Form 8938 and FBAR
- Filing thresholds and criteria: Form 8938 has higher thresholds compared to the $10,000 threshold for FBAR.
- Types of reportable assets: Form 8938 includes more types of foreign assets, while FBAR is limited to foreign bank and financial accounts.
- Filing authorities and submission methods: Form 8938 is filed with the IRS, whereas FBAR is filed with FinCEN.
- Filing deadlines: Both forms have different deadlines, with FBAR having an automatic extension option.
- Penalties for non-compliance: Both forms carry significant penalties, but FBAR penalties can be more severe for willful violations.
When Do You Need to File Both?
You may need to file both Form 8938 and FBAR if you meet the reporting thresholds for each. It’s essential to ensure compliance with both requirements to avoid penalties and potential issues with a tax audit.
How to Prepare and File Form 8938 and FBAR
Gathering Necessary Information
Collect all relevant financial statements and records for your foreign assets and accounts. This includes bank statements, investment accounts, and any other documentation of foreign financial holdings.
Completing Form 8938
Follow the IRS instructions for Form 8938, ensuring all specified foreign financial assets are reported accurately. Double-check for common mistakes, such as missing asset details or incorrect valuation.
Completing FBAR
File the FBAR electronically through FinCEN’s BSA E-Filing System. Ensure that all foreign bank accounts are listed, and the information matches your financial records.
Seeking Professional Help
Given the complexity of these forms, consulting a tax debt attorney can be highly beneficial. A professional can provide guidance on penalty abatement and help ensure compliance, reducing the risk of errors and penalties.
Conclusion
Understanding the differences between Form 8938 and FBAR is vital for taxpayers with foreign financial assets. By staying informed and compliant, you can avoid the significant penalties associated with non-compliance. If in doubt, seek a free consultation with a tax debt attorney to navigate the complexities of tax reporting and safeguard your financial interests.
