Whether you’re new to foreign taxable income, or you’re an experienced international businessperson looking for some clarification, you might be wondering: “what is FBAR and FATCA, anyway?” The difference between FATCA and FBAR is simply this: one is a declaratory form (FBAR), while the other is a federal law that took effect in 2010 (FATCA). They’re both linked to the same idea; namely, that you have certain tax obligations when it comes to foreign assets or earnings… and that failure to pay those liabilities can result in severe (or even life-changing) penalties.
FBAR and FATCA might be similar acronyms, but it’s helpful to know the distinctions between the two as you stay educated on your responsibilities as someone with earnings or assets in multiple countries. What is the difference between FBAR and FATCA?
Let’s start with FATCA, which stands for the Foreign Account Tax Compliance Act. In 2010, this legislation was passed by Congress alongside the HIRE Act, which was essentially a jobs stimulus package that required some creative funding to manifest. The perception at the time was, somewhat fairly, that there was a substantial segment of expatriate Americans not paying their fair share — and that wealthy individuals were underpaying their foreign tax obligations in general.
While it’s also true that many Americans living abroad were acting in good faith and not trying to skirt their tax liability, this perception of widespread foul play won out, leading to the HIRE Act being passed with FATCA as the income-generating legislation that could make HIRE possible.
Essentially, FATCA is a reporting requirement for foreign countries that mandates they fork over certain information about American account holders. The IRS put tremendous pressure on infamously opaque tax haven countries such as the Cayman Islands and Switzerland to sign the FATCA agreement and help the US enforce unpaid or underpaid taxes.
In short, FATCA worked — over a quarter of a billion dollars more in tax revenue was collected from Americans abroad, based on some clues the IRS left for international financial institutions. Namely, if they have an account holder who is US-born, with US-based contact information, power of attorney, and with attempted funds transfer to a US-based account, foreign banks are required under FATCA to cough up those details to the IRS.
FBAR is the form used by American taxpayers under the scope of FATCA to declare their foreign assets and/or earnings, if those Americans live abroad or have international holdings. Wondering if you need to file an FBAR? One of the quickest litmus tests is this: do you have a foreign bank account(s) with assets exceeding $10,000 in the previous tax year? If so, there’s a very good chance you’ll need to file an FBAR or face the consequences. This is true even if you merely have a so-called “financial interest” in the account, or even if you simply have signature authority on the account! In a nutshell, the IRS wants to know if you’re associated with $10,000 or more in foreign-held or foreign-earned assets. FBAR is the form that you file separately from your regular tax returns to declare those assets.
FBAR and FATCA reporting requirements are stringent, and for good reason. The IRS does not look kindly upon suspected, attempted, or temporarily successful tax cheats. Luckily, they do make a distinction between “willful” violation, and unintentional violation. Your veteran FBAR and FATCA attorney at Abajian Law can be an invaluable asset when drawing a bright line of distinction between “willful” and “unintentional” for the IRS.
If the IRS finds that you failed to file your FBAR unintentionally, you’re looking at a little less than $13,000 per violation. That’s regardless of the amount held overseas. Meanwhile, if they believe you intentionally hid your foreign assets or earnings, buckle up: $124,588 is the bill per violation on willful failures to file. However, you’ll be lucky if that’s all you pay: there are a litany of associated fees and penalties that come along with these violations which will be tacked on with impunity.
Whether you’re gearing up to file your first FBAR, or you have recently realized that you’re potentially in violation of FBAR reporting requirements under FATCA, it’s critical that you seek the advice of a qualified offshore tax attorney like the ones at Abajian Law. At our firm, we focus on this complicated and high-stakes area of law, handling our clients’ tax matters with the utmost discretion and professionalism.
As mentioned above, a critical element of contentious FBAR situations involves the IRS’ determination of whether or not your failure to file was willful. This decision on their part can have a profound effect on your financial and mental health for the rest of your life — it’s not something to be taken lightly or tackled on your own. If you know that you have unfiled FBARs, ignoring the problem won’t make it go away. You have certain rights and options that your attorney can illuminate for you; but it requires you to take the first step, pick up the phone, and call Abajian Law right now at 818-396-5059.