U.S. taxpayers with foreign financial assets are required to disclose them to the Internal Revenue Service (IRS) and the Financial Crimes Enforcement Network (FinCEN) through specific forms like the FBAR (FinCEN Form 114) and FATCA-related IRS Form 8938. Failure to file these forms—either inadvertently or willfully—can lead to severe penalties, both civil and criminal. This blog explores the differences between FBAR and FATCA, who must file, and the penalties for failing to comply with the foreign asset disclosure requirements.
Understanding FBAR and FATCA: Key Differences
FBAR – Report of Foreign Bank and Financial Accounts (FinCEN Form 114)
The FBAR is filed with FinCEN, not the IRS, and applies to U.S. persons with a financial interest in or signature authority over foreign financial accounts that exceed $10,000 in aggregate at any time during the calendar year.
FATCA – Foreign Account Tax Compliance Act (Form 8938)
FATCA requires specified U.S. persons to report certain foreign financial assets on Form 8938, which is attached to the federal income tax return (Form 1040). Reporting thresholds vary based on filing status and residency.
- Single filers living in the U.S.: Total foreign assets > $50,000 at year-end or > $75,000 at any time
- Married filing jointly: Thresholds double
- Higher thresholds apply to U.S. persons living abroad
Who Must File FBAR and FATCA Forms?
FBAR Filing Requirements:
- U.S. citizens, residents, and entities (LLCs, partnerships, trusts, corporations)
- With a financial interest in or authority over one or more foreign accounts with an aggregate value exceeding $10,000 at any time during the calendar year
FATCA Filing Requirements (Form 8938):
- Specified individuals (U.S. citizens, resident aliens, certain non-residents who elect to be treated as residents)
- With specified foreign financial assets over the reporting threshold
- Including financial accounts, stocks or securities issued by a non-U.S. person, foreign entities, and interests in foreign partnerships
FBAR Penalties for Non-Compliance
1. Non-Willful FBAR Violation
If the IRS determines that your failure to file the FBAR was non-willful (due to negligence or misunderstanding), the penalty is:
- Up to $10,000 per violation
Each unreported account can be treated as a separate violation. However, penalties may be reduced or waived if the taxpayer has reasonable cause and files voluntarily.
2. Willful FBAR Violation
If the IRS concludes that you intentionally failed to disclose foreign accounts, the penalties are much more severe:
- Greater of $100,000 or 50% of the account balance at the time of the violation
- Penalties may be assessed annually for each year of non-compliance
- Criminal penalties: Up to $250,000 in fines and 5 years of imprisonment
The courts have upheld harsh FBAR penalties in recent years, especially when taxpayers ignored prior notices or took deliberate steps to conceal accounts.
FATCA (Form 8938) Penalties
1. Failure to File Form 8938
The IRS imposes a base penalty of $10,000 per year for failing to file Form 8938 when required.
If the failure continues after receiving a notice from the IRS, an additional penalty applies:
- $10,000 for each 30-day period (or part thereof) after the IRS notice
- Maximum additional penalty: $50,000 per year
2. Accuracy-Related Penalties
In addition to filing penalties, if the failure to disclose results in an underpayment of tax, the IRS may assess:
- 20% of the underpayment due to undisclosed foreign financial assets
3. Criminal Penalties
In egregious cases involving fraud or concealment, taxpayers may also face:
- Fines up to $250,000
- Imprisonment up to 3 years
FATCA and FBAR violations can be prosecuted together, and both civil and criminal charges may apply simultaneously.
FBAR vs. FATCA: Dual Reporting Requirements
Many taxpayers are surprised to learn that they must file both FBAR and Form 8938 if their foreign holdings meet both sets of thresholds. While there is some overlap, the IRS requires separate filings because:
- FBAR is submitted to FinCEN (not part of your tax return)
- Form 8938 is submitted to the IRS (with Form 1040)
Failing to file one doesn’t exempt you from the other. Both are mandatory and subject to penalties independently.
Mitigating Penalties: Options for Late Filers
If you failed to file past FBAR or FATCA forms, you may qualify for reduced penalties or complete forgiveness by using the IRS’s voluntary compliance programs:
1. Streamlined Filing Compliance Procedures
Designed for non-willful violators. You must certify that your non-compliance was not intentional. Requirements include:
- File 3 years of amended returns with Form 8938 (if applicable)
- File 6 years of delinquent FBARs
- Pay all taxes and interest due
- Pay a reduced penalty (0% for foreign residents, 5% for U.S. residents)
2. Delinquent FBAR Submission Procedures
Available if you have properly reported all income on U.S. returns but forgot to file FBAR. No penalty will be assessed if you meet the eligibility criteria and include a reasonable cause explanation.
3. Delinquent International Information Return Submission Procedures
If you missed Form 8938 but paid all taxes due, you can file late forms and avoid penalties with a reasonable cause statement attached.
How to Stay Compliant Moving Forward
- Maintain accurate records of all foreign bank and investment accounts
- Track account balances to determine filing thresholds each year
- Work with a tax professional knowledgeable in international compliance
- Ensure you file both FBAR (due April 15, automatic extension to October 15) and Form 8938 (due with your tax return)
Conclusion
Penalties for failing to file FBAR or FATCA disclosures can be financially devastating and legally risky. The U.S. government has significantly increased enforcement in recent years, and ignorance of the law is not a valid defense. If you have foreign financial assets, ensure you understand your filing responsibilities and comply each year. If you’ve fallen behind, seek professional help immediately—IRS voluntary disclosure programs may offer a path to compliance with reduced or eliminated penalties.
