What is a Foreign Financial Asset

Introduction

So you’ve left the United States to live the expat life on the other side of the globe. Now you find yourself with foreign financial assets. Maybe you’ve opened a foreign bank account, have foreign business interests and investments, or draw from a foreign pension account. Depending on the monetary thresholds of your foreign assets, you may need to fill out some extra paperwork once tax season rolls around. In this handy guide, we’ll define foreign financial assets. We will also review forms and reporting requirements. Additionally, we will explain potential penalties and fines to help you stay compliant with the IRS.

What is Considered a Foreign Financial Asset?

Under the broad definitions outlined by the IRS, a foreign financial asset is any financial account at a bank or financial institution outside the United States. This applies if a US taxpayer owns, controls, or has signatory authority over it.

These types of foreign financial assets include:

• Checking and savings accounts
• Investments (stocks, bonds, and mutual funds)
• Foreign business interests
• Foreign trust or estate accounts
• Retirement and pension accounts

Keep in mind there are exceptions, which don’t need to be reported:

• Accounts held by a US entity
• Foreign branches of a US bank
• Foreign real estate
• Foreign government benefits (”Social Security”)

The types of accounts held and their monetary thresholds will determine the paperwork required. Expats must accurately complete and file these. This must be done alongside FinCEN 114 or included with Form 8938 in their annual tax return.

For more information, consult the IRS’s summaries on reporting FBAR and FATCA assets.

Why Are Foreign Financial Assets Important for Expats?

Expats often find themselves in a position where opening a foreign bank account is mandatory. This can be necessary for applying for leases and housing, paying bills and utilities, applying for residency, and receiving social programs — to name a few. Once a foreign account goes over a certain monetary threshold, the IRS wants to know about it. The same applies if a foreign financial asset holds a certain monetary value.

When it comes to reporting foreign financial assets, expats must be accurate and timely when filling out and filing all associated paperwork. Because the FBAR and FATCA were established to detect and prevent tax evasion and money laundering, the IRS and the Financial Crimes Enforcement Network treat reporting foreign assets as a high priority.

Foreign Financial Asset Reporting Requirements

Two of the most important things expats should be mindful of when tax season rolls around are the Foreign Bank Account Report (FBAR) and the Foreign Account Tax Compliance Act (FATCA).

What is FBAR (FinCEN Form 114)?

The Foreign Bank Account Report, otherwise known as FBAR or FinCEN Form 114, is a mandatory form. Expats must fill it out if the cumulative maximum balance of their combined foreign bank accounts totals $10,000 at any point in the year. This applies even if it’s only $1 over the monetary threshold. FBAR filing requirements include all foreign accounts in which an expat has both financial interest and signature authority. Though an FBAR has the same deadlines as a tax return, it is not filed with the IRS but with the Financial Crimes Enforcement Network (FinCEN) using FinCEN Form 114. This form is purely informational for US tax authorities, so you should not face any taxation based on the balance of your accounts. FBARs do have an automatic 6-month extension. We will discuss more below.

What is FATCA (Form 8938)?

The Foreign Account Tax Compliance Act, or FATCA, is a US federal law created to combat tax evasion. Under this law, US taxpayers are required to report any assets held in foreign bank accounts. The IRS also requires foreign financial institutions (FFIs) to report assets held by US account holders. If an expat’s foreign assets exceed $200k (or $400k when married and filing jointly), they must file Form 8938 (Statement of Specified Foreign Financial Assets) along with their annual tax return. However, if an expat lived in the US for at least part of the year, the threshold is lower. It is $50k if unmarried and $150k when married and filing jointly.

What Happens If You Don’t Report Foreign Financial Assets?

Reporting foreign financial assets is mandatory. Failure to accurately report and file the required forms, either FinCEN 114 or Form 8938 (or, in some cases, both), will result in severe and costly penalties. This will greatly increase the likelihood of an IRS audit that can go back as far as five years.

Regarding the FBAR, non-willful violations can be as high as $10,000 per year. Willful violations are significantly higher at $100,000 or 50% of the account balance per violation, whichever is greater. In extreme situations, willful violations can even lead to criminal charges, which include hefty fines and/or imprisonment.

Failure to file FATCA (Form 8938) results in a fine of $10,000, with an additional $10,000 for each 30 days the form remains unfiled. The IRS can also impose a penalty for understating foreign assets. This includes charging an additional 20% of the underpayment. Willful evasion is treated as a criminal charge. This can lead to prosecution, substantial fines, and imprisonment.

How to Report Foreign Financial Accounts and Assets

US expats must accurately report any foreign financial accounts and assets within the parameters set by the IRS. Expats who fall over the monetary thresholds for an FBAR must fill out and file FinCEN Form 114 separately with FinCEN (and not the IRS). If an expat’s assets are such that they fall over the higher 8938 thresholds, they must fill out IRS Form 8938 and include it with their income tax return.

Fortunately, expats reporting an FBAR (FinCEN Form 114) receive an automatic extension from April 15th till October 15th without requesting it. Expats also receive an automatic extension for FATCA (Form 8938) when included in their annual tax return.

Looking to simplify the process? When filing with MyExpatTaxes, we don’t charge extra for FBAR or FATCA. Our software will ask questions to determine the monetary thresholds of your foreign assets. When applicable, it will fill out and e-file the necessary forms to their respective government agencies along with your annual tax return. Should you require further assistance, our Reviewed and Premium plans include a review of your return and associated paperwork by a Tax Professional.

Conclusion

That may seem like a lot to take in, but reporting your foreign financial assets doesn’t have to be a dreaded task. Filling out extra forms and paperwork is just a part of the expat life. The process can be painless with the right information at your disposal.

Let us help you! MyExpatTaxes makes reporting and filing foreign assets a cinch. Sign up for a free account and pay only when you file or upgrade. Our real human support agents and Tax Professionals are available to ensure your return is complete and accurate before filing.

Get started for free, pick a plan when you’re ready. Or see the Pricing Page for all the details.