If FATCA isn't keeping you awake at night, it should be, according to practitioners. Ditto for FBAR.

The filing requirements under both can trap the unwary, and the penalties can be enormous.

The Foreign Account Tax Compliance Act, or FATCA, enacted as part of the Hiring Incentives to Restore Employment Act, is aimed at increasing tax receipts by identifying offshore U.S. accounts that could potentially be used for tax evasion purposes.

And it's not to be confused with FBAR, or Foreign Bank Account Reporting, which is a product of the Bank Secrecy Act of 1970. The FATCA reporting provisions for individual taxpayers, while somewhat redundant to the FBAR provisions, carry their own set of penalties and are filed with the tax return, rather than separately.

Though the FBAR requirement has been around for more than 40 years, the section that requires the filing of Treasury Form 90-22.1 has only been seriously enforced in the past few years. The provision applies to a person having an interest in or signature or other authority over a bank, securities or other financial account in a foreign country if the aggregate value of the accounts is greater than $10,000 at any time during the year.



At first glance, there are similarities between the two.

The FBAR form, Treasury Form 90-22.1, essentially asks for the same information as the FATCA form, IRS Form 8938. However, TF 90-22.1 isn't filed with the tax return, but is filed by June 30 of the year following the account activity it reports. Form 8938, Statement of Specified Foreign Financial Assets, is new for this filing season and should be filed with returns by the due date of the return.

The FBAR requires disclosure of foreign accounts aggregating over $10,000 at any time during the year, and has a set of penalties running as high as 50 percent of the account value per year.

FACTA Form 8938, on the other hand, is required when the total value of specified foreign assets exceeds certain higher thresholds. For example, a married couple living in the U.S. and filing a joint tax return would not file Form 8938 unless their total specified foreign assets exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the year. Form 8938 is not required from individuals who do not have an income tax return filing requirement.

And while the information asked for is similar, Form 8938 does not replace or otherwise affect a taxpayer's obligation to file an FBAR. It has its own penalties - failure to file could result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification. A 40 percent penalty on any understatement of tax attributable to non-disclosed assets can also be imposed.

Temporary regulations issued last December seem to include ordinary transactions, according to James M. Robbins, a principal at Top 100 CPA and business advisory firm Marks Paneth & Shron. "For example, if a U.S. person owns real estate in the U.K., there's no reporting requirement so long as they own it directly," he said. "But if the individual wants to set up a U.K. limited company to protect against liability, the foreign entity would suddenly be trapped by FATCA. It's worded so broadly that even a loan to a foreign not-for-profit appears to be reportable."

FATCA also requires foreign financial institutions to report information about accounts held by U.S. taxpayers directly to the IRS. Registration for banks and other foreign financial institutions will take place through an online system, which will become available by Jan. 1, 2013. The IRS says that it will work closely with businesses and foreign governments to implement FATCA effectively.

"The bank reporting requirement doesn't kick in until 2013, but the reporting requirement for individuals starts with 2011 returns," said David Gannaway, a principal in Top 100 Firm Citrin Cooperman's Valuation and Forensic Services Group and a former special agent with IRS Criminal Investigation.

Under the FATCA requirements, a married taxpayer living in the U.S. and filing a joint return must file the new Form 8938 if the account held more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year. "If the account held $148,000 on July 1, but $98,000 on December 31, the account holder would have to file the FBAR form and check Schedule D Question 7, but would not have to file the FATCA form," explained Gannaway.



The penalties for noncompliance with the FBAR requirements may come as a shock to those who unwittingly run afoul of them, according to Gannaway.

"The highest civil penalty could be 50 percent of the account balance per year. That could be more than the value of the account," he said.

Two voluntary compliance programs, in 2009 and 2011, allowed taxpayers who had failed to report their foreign accounts to come forward and pay greatly reduced penalties - 20 percent of the highest account balance for only one year in the first program, and 25 percent for only one year in the second program, Gannaway said.

A third program has been instituted, almost identical to the 2011 program, except that its high penalty is 27.5 percent. "That's 27.5 percent of the highest aggregate balance in the account during the eight full tax years prior to the disclosure," noted Kevin Packman, a tax partner at law firm Holland & Knight and chair of its offshore compliance team. "It's hard to say what the right number is, but if they put it too high no one will come forward. From the government's viewpoint, the third program makes sense."

Unlike the two previous programs, the new one has no set termination date. However, the IRS reserves the right to change the terms of the program at any time. For example, the IRS might increase penalties in the program for all or some taxpayers or defined classes of taxpayers, or decide to end the program entirely at any point.

Although the prior programs had tremendous success, there are areas that could use improvement, according to Barbara Kaplan, a shareholder in the law firm of Greenberg Traurig. "The prior programs were thought to be too harsh, and the same holds true of this one," she explained. "For example, it doesn't distinguish between levels of fault or responsibility of taxpayers."

"Someone who didn't participate in setting up the account or do anything other than fail to report income, or did report the income but failed to report the existence of the account on the FBAR form, is treated as harshly as someone who engaged in active tax evasion and deceit," she said.

It is also possible that a taxpayer failed to include the income in the tax return but that it had no tax consequence, or a de minimis tax consequence, she observed. "In those situations, it's hard to say what was the motivating factor. Rather than trying to hide the tax, it's more likely they were trying to hide the existence of the account, or they didn't know they had to file the FBAR," she said. "The government is treating the taxpayers in these cases just as if the unreported tax were $100,000. The penalty is not on the amount of income, but on the amount in the account, so the program is great for the real crook but not so great for people who simply misunderstood their responsibility."

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