The National Taxpayer Advocate has proposed changes to the Foreign Account Tax Compliance Act (FATCA) reporting requirements in an effort to ease duplication for taxpayers – particularly those who also file the Report of Foreign Bank and Financial Accounts (FBAR).
The FATCA was signed into law on March 18, 2010. This legislation required individuals to report their interest in specified foreign financial assets on Form 8938, beginning with tax year 2011. As accounting firms and practitioners familiarized themselves with the new reporting requirements, questions arose regarding the similarities between the new Form 8938 and the existing FBAR. The FBAR (now referred to as FinCEN Report 114; formerly TD F 90-22.1) had been around for 40 years, originally introduced in 1970 as part of the Bank Secrecy Act.
Despite Form 8938 and the FBAR having different asset value thresholds, filing deadlines and reporting mechanisms, there appeared to be a considerable amount of overlap in the reporting requirements. The additional compliance burden created by the FATCA disclosure requirements was shared by both accountants and their clients. Adding a layer of stress to the confusion, the new Form 8938 came complete with its own set of stiff civil and criminal penalties for noncompliance.
Another, perhaps unintended, consequence of the FATCA laws has been the impact on U.S. citizens living abroad and the foreign financial institutions (FFI’s) with which they do business. Because of new withholding, documentation and reporting requirements placed on FFI’s as presented in FATCA, it has become more difficult for U.S. citizens living overseas to open and maintain bank accounts with FFI’s. Certain FFI’s have been closing out the foreign accounts of U.S. citizens in response to FATCA requirements.
On April 23, 2015, in an effort to address the overlap and duplicative disclosure requirements, the National Taxpayer Advocate issued its “Recommendations for Published Guidance under IRC § 6038D and 1471: Eliminate Duplicative Reporting of Assets on the FATCA Form 8938 if the Asset is Reported or Reflected on the FBAR (FinCEN Report 114) and Exclude Financial Accounts Maintained by a Financial Institution in the Country of Which the U.S. Person is a Bona Fide Resident from FATCA Reporting.”
In its current state, Form 8938 contains reporting exceptions that serve to eliminate duplicative disclosure if the foreign assets in question are reported elsewhere (Form 3520, 3520-A, 5471, 8621, 8865, 8891). Not included in this list of excepted information returns is the FBAR, FinCEN Report 114. The Advocate has recommended that the FBAR be added to this list of exceptions on Form 8938.
Currently, Form 8938 is not required for a U.S. person who is a bona fide resident of a U.S. possession and maintains accounts with an FFI organized under the laws of that U.S. possession. The same, however, does not apply to U.S. citizens who are bona fide residents of a foreign country. As part of the proposal issued by the Advocate, it is suggested that “accounts opened by U.S. citizens in a foreign country of bona fide residence are not ‘offshore’ accounts designed for tax avoidance. These bona fide residents have a legitimate need for local banking services in their countries of residence.” The Advocate is therefore recommending that the 8938 filing requirement be eliminated for these U.S. citizens, provided that such assets have been reported on a timely filed FinCEN Report 114.
The international tax eExperts at Marcum will continue to keep readers apprised of any further changes to these filing requirements.