FATCA and FBAR – What’s the Big Deal?


September 16, 2014

Dudley Pierce Baker
Ex-Pat since 1999

I don’t claim to be a tax expert but I do have some knowledge and background on this subject matter that may be of interest to all readers.

As we get started let’s not forget that the tax system in the United States operates on what is referred to officially as ‘voluntary compliance’, reality is it actually operates on ‘fear’.

U.S. citizens and U.S. persons holding assets outside of the United States have two different required filings depending on the amount of dollars in question.

FBAR is the Report for Foreign Bank and Financial Accounts and essentially comes into play if you have $10,000 or more outside of the United States.

United States persons are required to file an FBAR if:

1.     The United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and

2.     The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported.

United States person includes U.S. citizens; U.S. residents; entities, including but not limited to, corporations, partnerships, or limited liability companies, created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.

There are some exceptions to this FBAR reporting which can be found here.

Then we have FATCA which is the ultimate invasion of the whereabouts of your financial assets located any where in the world.

No one likes FATCA but (for now) it is the law of the land and not following the required reporting will only create many potential problems for those individuals and companies choosing to not comply.

FATCA, The Foreign Account Tax Compliance Act was presumably designed as a measure to crack down on money laundering and tax evaders who hide assets in offshore accounts. But the law is causing global scale headaches for banks and their clientele alike.

Many Americans residing overseas are reporting banking lockout. Many foreign financial institutions have simply chosen to eliminate their U.S. citizen and U.S. person client base in order to minimize their exposure to FATCA reporting requirements, withholding fees and potential penalties, and frankly who can blame them.

“FATCA was passed in 2010 as part of the HIRE act. Starting July 1, 2014 foreign financial institutions (FFI) will be required by the U.S. government, under FATCA, to report information regarding accounts of all U.S. citizens (living in the United States and abroad), U.S. “persons,” green card holders and individuals holding certain U.S. investments to the IRS all their clients who are “U.S. persons”. FFI that do not become compliant will be subject to a 30 percent withholding on their U.S. investments when they are cashed in, which will directly impact FFI clients with U.S. holdings.

FATCA also requires U.S. citizens who have foreign financial assets in excess of $50,000 (higher for bona fide residents overseas: $200,000 dollars for single filers and $400,000 dollars for joint filers – see the IRS website for more details) to report those assets every year on a new Form 8938 to be filed with the 1040 tax return….”

A few helpful links for U.S. Taxpayers:
Taxpayers Living Aboard
U.S. Citizens and Resident Aliens Abroad
U.S. Citizens and Resident Aliens Abroad – Filing Requirements
Report of Foreign Bank and Financial Accounts – FBAR

Who am I?

I have been an ex-pat since 1999 and enjoy a great life living outside the United States. Not only am I an ex-pat but I am also a retired IRS agent with over 29 years of service before retiring in 1996. You may have seen another financial service quoting an unnamed retired IRS agent with 29 years but that is not me and I have no knowledge if that person even exists.

For much of my career with the IRS I was an IRS agent – team coordinator and the lead agent on the largest corporations in the world. I have not performed any tax work for hire since my retirement and my interests lie with my various financial related websites.

Again, What’s the Big Deal?

 Allow me to discuss briefly two terms that are relevant to our discussion:

 Tax Avoidance and Tax Evasion

Tax avoidance simply is making use of the current tax laws to ones advantage while tax evasion is the intentional disregard for the laws, omission of income, overstating of expenses, in essence, outright fraud.

For most U.S. citizens with foreign accounts we would assume they are doing so to diversify their assets on a global basis and there is nothing wrong or immoral with these transactions as this would fall under the tax avoidance definition, in my opinion.

Of course, income earned or gains derived in foreign countries are reportable as income on their U.S. tax returns even if those individuals do not receive statements from those foreign financial organizations similar to the 1099s in the United States.

Some U.S. citizens living abroad may feel secure (for some reason) in not reporting gains or income earned in foreign accounts or from real estate transactions. These individuals may not realize that they are now entering the area of tax evasion and this is not where you really want to be. You don’t want to run a fowl of the system and be subjected to a criminal investigation, so those individuals should think twice as to the potential repercussions of their actions.

Getting back to basics, it all boils down to a reporting issue.

·      The FBAR requires you to report accounts that have over $10,000 in foreign accounts with a June 30 filing date.

·      FATCA also kicks in with Form 8938 to be filed with the 1040 tax return for those having foreign financial assets in excess of $50,000.

Unless you are prepared to renounce your U.S. citizenship , also see this recent article on Forbes.com or relocate to Puerto Rico, a territory of the United States, to take advantage of their generous tax filing status, I would suggest U.S. citizens just file the required forms. Yes, the IRS will now have all the details on your foreign accounts, but if you are reporting your income correctly and not attempting to commit tax evasion, what’s the big deal?

Another option (not advised)

Remember the movie, Raiders of the Lost Ark with Indiana Jones and the last scene in the large warehouse? Is it possible the IRS could even find the FBARs and FATCA filings or are they lost in a similar government warehouse.

governmentwarehouse-fatca                                      Indy

However, not correctly reporting will create many sleepless nights for you with the fear of being discovered. The potential penalties should outweigh the minimal requirements of correctly reporting ones transactions as required by law.

Until the laws are changed (if ever) for those U.S. citizens with foreign assets abroad we must conclude with our opening title…

 What’s The Big Deal?


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