Digital Nomad Tax Guide Part V - Banking, FATCA, & FBARs

An Introduction

Quick note on this section. These rules are scary. Prepare yourself. There are many details I have not included. The purpose of this section is make you aware of certain rules and scare you into carefully consider whether these rules apply to you, so that you may hire a professional for assistance.

Many online sources recommend that nomads put clients payments and other funds into international bank accounts. This advice is given for a few reasons. Here, I will not dive into those or otherwise discuss the ins and outs of choosing international banking options as I am not a financial advisor who can counsel on exchange rates, nor am I a licensed lawyer in each different prospective nation.

Here, I will discuss an often overlooked legal requirement. The Foreign Tax Compliance Act (FATCA). FATCA requires certain U.S. persons to report assets held outside of the United States. The penalties are severe, so read carefully.

What the Hell is a FATCA & an FBAR?

FATCA stands for the Foreign Account Tax Compliance Act. FATCA is a law that requires foreign financial assets be disclosed as part of a taxpayer’s tax return. An FBAR is a Report of Foreign Bank and Financial Accounts. The FBAR is separate from a tax return is a filed online with the Financial Crimes Enforcement Network (FinCEN), which is a bureau of the Treasury Department.

Who Must File an FBAR & When?

A U.S. person who has a financial interest OR signature authority over at least one financial account located outside of the U.S. where the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year must file an FBAR.

The FBAR is due April 15th.

There are two pieces to this rule that trip up taxpayers. The first is the signature authority bit. Even if the money in the foreign account does not belong to the taxpayer, she must file an FBAR is she has signature authority over the account. This often occurs when a taxpayer has control over a child or some other person’s account. Taxpayers also have FBAR obligations when they control accounts in the name of foreign corporations.

The other tricky issues is the aggregate value bit. A taxpayer has a FBAR requirement if she has one foreign account with $10,001 or 15 accounts totaling $10,001.

FBARs are a common issue for non-citizens with green cards as they usually leave their assets in their home country accounts. However, nomads who choose to open foreign accounts need to be aware of these requirements.

To Whom Does FATCA Apply?

As noted above, FATCA rules effect requirements on a taxpayer’s tax return. Holders of foreign accounts may need to report foreign accounts on a Schedule B and Form 8938, Statement of Special Foreign Financial Assets.

U.S. citizen must report specified foreign financial assets on the 8938 if the aggregate value exceeds certain thresholds. The reporting threshold vary depending on a taxpayers’ filing status. Here are the thresholds (these numbers are taken from 2017 and subject to change):

• Individuals filing as single – must report is the total value of specified foreign financial assets is more than $50,000 on the last day of the tax year OR more than $75,000 at ANY time during the year;
• Married taxpayers filing joint – changes the numbers to $100,000 and $150,000 respectively;
• Married taxpayers filing separately – same as those filing as single.

These numbers are increased for individuals who meet the foreign tax home test (see the 2nd rule under the FEIE). For these individuals, the numbers change to the following:

• Single filers & married filing separately - $200,000 the end of the year OR $300,000 at any time during the year.
• Married taxpayers – the numbers change to $400,000 and $600,000

What are "Foreign Financial Assets?"

The IRS pretty clearly lays out what are deemed foreign financial assets. Here is exactly what the applicable IRS form instructions (8938) define as specified foreign financial assets:

Specified foreign financial assets include the following assets. 

1. Financial accounts maintained by a foreign financial institution. 
2. The following foreign financial assets if they are held for investment and not held in an account maintained by a financial institution: 
3. Stock or securities issued by someone that is not a U.S. person (including stock or securities issued by a person organized under the laws of a U.S. possession), 
4. Any interest in a foreign entity, and 
5. Any financial instrument or contract that has an issuer or counterparty that is not a U.S. person (including a financial contract issued by, or with a counterparty that is, a person organized under the laws of a U.S. possession).

As you can see, the definition is quite broad. The instructions also go on to define each of the items in that definition. You check that out by Googling the IRS Form 8938 Instructions.

Penalties

Failure to meet the FATCA and FBAR requirements each have penalties.

The FBAR penalty for failing to file differs depending on whether the failure was “willful” or “non-will.” I’m not going into the specifics on how those are defined here. The penalty for willful noncompliance is up to the value of the account over an audit period. You read that right. If you have a foreign account with $100,000 in it, and you fail to report that account, the penalty may be $100,000. The penalty for a non-willful taxpayer is lower and is determined based on various facts and circumstances 

The penalty for failing to file the form 8938 when required by FATCA is up to $10,000. If a taxpayer receives notice of the failure to file and fails to then file within 90 days, the taxpayer may be subject to an additional penalty of $10,000. The penalty countinues to accrue at that point in the amount of $10,000 per everything 30 days the taxpayers fails to file until the total penalty accrues to (and maxes out at) $60,000. 

In Conclusion...

As you can see, these foreign account disclosure processes are not something to take lightly. If you think they may apply to you, consult with a tax attorney who specializes in international tax to determine your requirements and remedies to previous non-compliance if that applies to you.

Quick Links to Each Part of this Blog Series

Part I

Part II

Part III 

Part IV 

Part V