Foreign accounts and assets can create U.S. reporting obligations even when no additional income tax is due. Determining what applies requires a review of the taxpayer’s status, the type and value of the assets, prior filings, and the relevant years.
Margolies Law Office helps taxpayers evaluate foreign reporting issues and options for correcting past omissions. Before submitting late forms or choosing a disclosure procedure, it is important to understand the requirements and consequences of the available approaches.
Key Takeaways
- Foreign accounts and assets can create U.S. reporting obligations even when no additional income tax is due.
- FBAR and Form 8938 are separate requirements with different coverage, thresholds, and filing locations, and both can apply at the same time.
- Streamlined procedures address qualifying non-willful conduct, but the foreign and domestic tracks have different eligibility rules and are not interchangeable.
- The foreign nonresidency test requires the absence of a U.S. abode and at least 330 days outside the United States, while domestic eligibility requires all required returns for the relevant three years to already be filed.
- Streamlined relief can reduce specified penalties, but tax and interest remain payable, and the domestic track generally includes a five-percent miscellaneous offshore penalty.
- Cases involving possible willful conduct or criminal exposure may call for a different approach, such as the IRS Voluntary Disclosure Practice, and should be reviewed with an attorney before any submission.
FBAR and Form 8938 are different requirements
An FBAR reports qualifying foreign financial accounts to the Financial Crimes Enforcement Network. Form 8938 reports specified foreign financial assets to the IRS as part of a federal tax return; one filing does not automatically replace the other.
The forms have different coverage, thresholds, and exceptions. A reporting review should consider each separately rather than assume that filing one form satisfies every obligation.
Question : Where is it filed?
FBAR : With FinCEN, separately from the income tax return
Form 8938 : With the IRS, as part of the applicable tax return
Question : What does it address?
FBAR : Qualifying foreign financial accounts
Form 8938 : Specified foreign financial assets
Question : What is the general reporting threshold?
FBAR : Aggregate foreign financial accounts exceeding $10,000 at any time during the calendar year, subject to the applicable filing rules
Form 8938 : Different thresholds based on factors including filing status and residence
Question : Can both be required?
FBAR : Yes, when both sets of requirements apply
Form 8938 : Yes, when both sets of requirements apply
Question | FBAR | Form 8938 |
|---|---|---|
Where is it filed? | With FinCEN, separately from the income tax return | With the IRS, as part of the applicable tax return |
What does it address? | Qualifying foreign financial accounts | Specified foreign financial assets |
What is the general reporting threshold? | Aggregate foreign financial accounts exceeding $10,000 at any time during the calendar year, subject to the applicable filing rules | Different thresholds based on factors including filing status and residence |
Can both be required? | Yes, when both sets of requirements apply | Yes, when both sets of requirements apply |
The FBAR requirement generally applies to a U.S. person with a financial interest in, or signature or other authority over, qualifying foreign accounts above the aggregate threshold. Account ownership and authority can therefore matter as well as the balance.
Learn more about FBAR reporting and Form 8938 and foreign asset reporting.
What if a form was missed?
A late or omitted form does not establish which correction procedure is appropriate. The review needs to consider what was required, what income was reported, why the omission happened, and whether the IRS has already contacted the taxpayer.
The available approaches have different eligibility rules. Streamlined procedures address qualifying non-willful conduct, while other situations may call for a different filing or disclosure analysis. (IRS streamlined procedures)
Streamlined procedures for non-willful conduct
The IRS describes non-willful conduct as negligence, inadvertence, mistake, or a good-faith misunderstanding of the law’s requirements. A taxpayer’s statement that they did not know about a form is not a substitute for reviewing the full facts and the required certification.
Foreign and domestic procedures
The foreign and domestic streamlined procedures are not interchangeable. For U.S. citizens and lawful permanent residents, the foreign nonresidency test includes both the absence of a U.S. abode and at least 330 full days outside the United States in a qualifying year; joint filers both must meet the applicable requirement, and different rules apply to individuals who are not citizens or lawful permanent residents.
Domestic streamlined eligibility generally requires that any required U.S. tax returns for the relevant three years already have been filed. Its miscellaneous offshore penalty and other requirements differ from the foreign procedure.
These are selected distinctions, not a complete eligibility checklist. A review should address all applicable requirements before a submission is prepared.
What streamlined relief does and does not mean
Eligible taxpayers who comply with the foreign streamlined instructions may receive relief from specified penalties, but tax and interest remain payable. Domestic streamlined procedures generally include a five-percent miscellaneous offshore penalty calculated under the program’s rules, along with tax and interest.
Do not assume that a particular percentage describes your total exposure or that a submission will receive the expected treatment regardless of its accuracy. Learn about the firm’s work with streamlined offshore procedures.
When another disclosure approach needs review
If the facts raise concerns about willful conduct or possible criminal exposure, seek legal advice before making a submission. The firm can review whether the IRS Voluntary Disclosure Practice or another approach warrants consideration.
No website summary can determine which procedure is appropriate for a particular taxpayer. Our voluntary disclosure service provides more information about this area of representation.
Why a case-specific penalty review matters
Different reporting failures can involve different penalties, defenses, and relief provisions. A maximum statutory or inflation-adjusted figure is not necessarily the amount a particular taxpayer will owe.
Rather than rely on a single penalty chart, the review should identify the form, the year, the facts behind the omission, and the correction procedures that may be available. We explain the issues relevant to your circumstances without assuming the most severe outcome.
What information is useful at the start?
- Taxpayer status and residence: Citizenship or residency information and where you lived during the relevant years.
- Accounts and assets: The countries involved and the general types of accounts, investments, or other assets.
- Filing history: Available tax returns, FBARs, Forms 8938, and other foreign reporting forms.
- Income reporting: Whether related income was included on filed U.S. returns.
- IRS contact: Any notices, examination letters, or requests already received.
Do not include account numbers or detailed financial records in an initial website message. Ask the office how to provide sensitive documents through the appropriate secure process.
Questions about foreign reporting
Q. Does an account need to earn income before reporting can apply?
A. Not necessarily. Foreign account and asset reporting can apply independently of whether an account generated income, but the taxpayer must still meet the relevant form’s filing requirements. (IRS reporting comparison)
Q. Can I choose the streamlined procedure myself?
A. The procedure has specific eligibility and certification requirements. A review is particularly important when the taxpayer’s residency, prior filings, or the reasons for noncompliance are unclear. (IRS streamlined procedures)
Q. What if I also have unfiled U.S. income tax returns?
A. That needs to be considered as part of the same review. The domestic and foreign streamlined procedures treat prior filing history differently, so missing returns can affect which approach is available.
Review your reporting obligations
Margolies Law Office can discuss your reporting history, identify the questions that need further review, and explain potential next steps. The initial consultation is free and carries no obligation.