What Is the Difference Between FBAR and FATCA?

U.S. persons with financial ties abroad often encounter reporting obligations designed to enhance tax transparency and deter offshore tax evasion. Two significant requirements are the Report of Foreign Bank and Financial Accounts (FBAR) and the Foreign Account Tax Compliance Act (FATCA). While both aim to ensure compliance regarding foreign assets, they operate under different legal frameworks and have distinct reporting mechanisms. Understanding these regulations is important for compliance.

Understanding FBAR

The FBAR is a reporting requirement under the Bank Secrecy Act (BSA), designed to identify individuals using foreign financial accounts to conceal taxable income or engage in illegal transactions. It requires disclosure of foreign financial accounts to the Financial Crimes Enforcement Network (FinCEN).

A U.S. person must file an FBAR if they have a financial interest in or signature authority over at least one financial account located outside the United States. U.S. persons include citizens, residents, and U.S.-formed entities. A financial interest means being the owner of record or having legal title, while signature authority refers to the ability to control account assets.

The types of foreign financial accounts that must be reported are broad, encompassing checking accounts, savings accounts, brokerage accounts, mutual funds, and certain foreign-issued life insurance or annuity policies with a cash value. An account is considered “foreign” if it is maintained by a financial institution located outside the United States, its territories, and possessions. An account with a U.S. bank branch physically located in Canada is considered a foreign account for FBAR purposes.

An FBAR must be filed if the aggregate maximum value of all foreign financial accounts exceeds $10,000 at any time during the calendar year. This threshold applies to the combined value of all accounts, not per individual account.

The FBAR is filed electronically using FinCEN Form 114. It requires specific account information. Records supporting the information reported on the FBAR, such as account statements, must be retained for five years from the FBAR’s due date.

The completed FinCEN Form 114 is submitted through the BSA E-Filing System website. The FBAR is an annual report due by April 15th following the calendar year being reported. There is an automatic extension to October 15th if the April 15th deadline is not met.

Failure to file an FBAR can result in substantial penalties. Non-willful violations can lead to civil monetary penalties of up to $16,536 per violation. For willful violations, penalties can be significantly higher, reaching the greater of $100,000 or 50% of the account balance at the time of the violation, and may also include criminal prosecution.

Understanding FATCA

The Foreign Account Tax Compliance Act (FATCA) was enacted to combat tax evasion by U.S. persons holding investments in offshore accounts. While foreign financial institutions have obligations under FATCA, U.S. individuals also have direct reporting requirements.

U.S. individuals are required to file Form 8938, “Statement of Specified Foreign Financial Assets.” This filing obligation applies to U.S. citizens, resident aliens, and certain nonresident aliens who are required to file an annual income tax return. Form 8938 provides the IRS with a comprehensive view of a U.S. taxpayer’s foreign financial assets.

“Specified foreign financial assets” include a broader range of assets than those covered by the FBAR. These assets include foreign financial accounts and other non-account investment assets. Examples include foreign stock or securities not held through a U.S. financial institution, foreign partnership interests, foreign-issued life insurance or annuity contracts, and interests in foreign trusts or estates.

FATCA reporting thresholds for individuals are generally higher than FBAR thresholds and vary based on the taxpayer’s filing status and residency. For single filers residing in the U.S., Form 8938 must be filed if the total value of specified foreign financial assets exceeds $50,000 on the last day of the tax year or $75,000 at any time during the year. For married individuals filing jointly and residing in the U.S., the thresholds are $100,000 on the last day of the tax year or $150,000 at any time during the year. Higher thresholds apply to U.S. persons living abroad, for instance, $200,000 at year-end or $300,000 at any time for single filers abroad.

FATCA reporting for individuals is completed using Form 8938. It requires detailed information about each asset, including its maximum value and any income generated. The value of assets reported on Form 8938 must be converted to U.S. dollars using the appropriate IRS exchange rate for the year.

The completed Form 8938 is attached to the individual’s annual income tax return (Form 1040). The filing deadline for Form 8938 is the same as the tax return due date, including any valid extensions.

Failure to file Form 8938 can result in penalties. A $10,000 penalty may be assessed for initial failure to disclose, with additional penalties of up to $50,000 for continued non-compliance after IRS notification. Underpayments of tax related to non-disclosed foreign financial assets can incur an additional 40% substantial understatement penalty. The statute of limitations for assessing tax may also be extended indefinitely if required information is not provided.

Navigating Both Requirements

FBAR and FATCA reporting requirements, while both addressing foreign financial holdings, operate under different authorities and cover different scopes of assets.

FBAR is mandated by FinCEN using FinCEN Form 114, while FATCA is an IRS regulation using Form 8938. The scope of assets differs: FBAR focuses on foreign financial accounts, while FATCA covers a broader range of “specified foreign financial assets,” including accounts and non-account investment assets.

Filing thresholds also differ. FBAR requires reporting if aggregate foreign financial accounts exceed $10,000. FATCA’s Form 8938 has higher, varied thresholds based on filing status and residency. Submission methods are distinct: FBAR’s FinCEN Form 114 is filed electronically with FinCEN, while FATCA’s Form 8938 is attached to the annual income tax return (Form 1040) filed with the IRS. Penalty structures also differ.

Many U.S. persons with foreign financial accounts will find they need to file both an FBAR and Form 8938, as the requirements often overlap. Filing one does not exempt an individual from filing the other if both sets of thresholds are met. For example, an individual with a foreign bank account valued at $15,000 will likely need to file an FBAR but may not meet the higher Form 8938 threshold if they reside in the U.S. and are a single filer. Conversely, an individual might hold foreign stock directly (not in an account) valued above the FATCA threshold but not the FBAR threshold, requiring only Form 8938.