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Trust Law/Level VI · Protection/6.2 Offshore/Lesson 4

Reporting: FBAR, FATCA, CRS

The US reporting duties for foreign accounts and foreign trusts, FBAR, Form 8938 and Forms 3520 and 3520-A, and how CRS shares information about non-US persons.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. File the FBAR free on FinCEN’s BSA E-Filing System when foreign accounts total over $10,000 at any time; due 15 April, automatically extended to 15 October. Catch: non-wilful penalties apply per report (Bittner, 2023); wilful ones reach the greater of $100,000 or 50%.
  2. Form 8938 rides free with your return: unmarried US residents file above $50,000 at year end or $75,000 at any time, joint filers $100,000/$150,000, and residents abroad $200,000/$300,000 unmarried. Catch: $10,000 penalty plus 40% on related understatements.
  3. Form 3520 is due by the 15th day of the 4th month after year end; a substitute Form 3520-A attached by then counts as timely. Catch: penalties start at the greater of $10,000 or 35% of transfers or distributions, or 5% for 3520-A.
  4. Missed filings non-wilfully? Streamlined procedures cost US residents tax, interest and a 5% miscellaneous offshore penalty; qualifying non-residents owe no penalties. Catch: you must certify non-wilful conduct, and an open IRS civil examination makes you ineligible.
  5. Non-US persons should assume CRS sends account data to their home tax authority, so the lean route is simply declaring it; the US uses FATCA instead of CRS. Catch: privacy from the public is lawful, concealment from tax authorities is not.

MaterialsThe FinCEN page on FinCEN Form 114 (FBAR), free on fincen.govThe IRS comparison of Form 8938 and FBAR requirements, free on irs.govThe IRS page on foreign trust reporting requirements and tax consequencesLesson 6.2.1, on international trusts, and lesson 5.1.5, on grantor trusts

Wonder

  1. Why might one foreign account have to be reported on two different forms?
  2. Which forms apply to someone who sets up, funds or receives money from a foreign trust?
  3. How do other countries learn about accounts held by their own residents abroad?

Explore

  1. US citizens and residents are taxed on worldwide income, and owning foreign accounts or a foreign trust is legal. The law adds disclosure duties, separate from paying tax: a form may be due even in a year with no taxable income. This lesson covers the main US forms and the international exchange system. Thresholds and penalties are set by statute and IRS guidance and can change, so the current IRS and FinCEN pages are the authority.
  2. The Report of Foreign Bank and Financial Accounts (FBAR), FinCEN Form 114, comes from the Bank Secrecy Act. A US person, including a trust or estate, with a financial interest in or signature authority over foreign financial accounts must file if their combined value exceeded $10,000 at any time in the calendar year. It is filed electronically with FinCEN, not with the tax return, and is due 15 April with an automatic extension to 15 October.
  3. The Foreign Account Tax Compliance Act (FATCA), enacted in 2010, has two parts. Foreign financial institutions report accounts held by US persons to the IRS, or face 30% withholding on certain US payments. US taxpayers report ‘specified foreign financial assets’ on Form 8938 with their tax return. For unmarried taxpayers living in the US, the threshold is more than $50,000 on the last day of the year or more than $75,000 at any time; for married couples filing jointly, $100,000 or $150,000. Higher thresholds apply to those living abroad: $200,000 or $300,000 unmarried, $400,000 or $600,000 joint.
  4. Foreign trusts have their own forms under IRC §6048. A US person files Form 3520 to report transfers to a foreign trust, distributions received from one, and large gifts from foreign persons. A foreign trust with a US owner under the grantor trust rules must file Form 3520-A, and the US owner is responsible for making sure it does. Under IRC §6677, failing to report a transfer or distribution can cost the greater of $10,000 or 35% of the amount; for Form 3520-A, the greater of $10,000 or 5% of the trust assets treated as owned by the US person.
  5. Other penalties are also significant. For FBAR, a non-wilful violation can bring a civil penalty of up to $10,000, adjusted for inflation, applied per report rather than per account (Bittner v. United States, 2023); a wilful one can bring up to the greater of $100,000 or 50% of the account balance, and criminal penalties are possible. Missing Form 8938 brings a $10,000 penalty, up to $50,000 more after an IRS notice, and a 40% penalty on any related understatement of tax. Under IRC §6501(c)(8), if required foreign information returns are not filed, the time for the IRS to assess tax can stay open.
  6. The OECD’s Common Reporting Standard (CRS), approved in 2014, is the international counterpart for non-US persons. Financial institutions in participating jurisdictions identify account holders, including some trusts and their beneficiaries and settlors, who are tax resident elsewhere, and report them to their own tax authority, which exchanges the information automatically with the account holder’s home country. The United States does not participate in CRS and relies on FATCA and its intergovernmental agreements. Together these systems mean foreign accounts are routinely reported to tax authorities.

Key facts

  • FinCEN Form 114 (FBAR) is required when a US person’s foreign financial accounts total more than $10,000 at any time in the year.
  • The FBAR is due 15 April with an automatic extension to 15 October and is filed with FinCEN, not with the tax return.
  • FATCA (2010) requires foreign financial institutions to report US account holders and US taxpayers to file Form 8938 above set thresholds.
  • Form 8938 thresholds for unmarried taxpayers living in the US are more than $50,000 at year end or more than $75,000 at any time.
  • Under IRC §6677, Form 3520 failures can cost the greater of $10,000 or 35%, and Form 3520-A failures the greater of $10,000 or 5%.
  • The OECD Common Reporting Standard (2014) exchanges account information about non-residents among participating jurisdictions; the US uses FATCA instead.

Exercise nine, six, three, one

9CollectList up to 9 facts about a foreign account or foreign trust described in a case study or article you are reading (some have fewer), such as balances, who holds signature authority, transfers, distributions, gifts and where the account holder lives.
6ClusterSort them into 6 categories: account balances, ownership and signature authority, transfers into a trust, distributions and gifts received, residence and filing status, and facts you are unsure about.
3DistillReduce the 6 categories to 3 groups: facts that bear on the FBAR, facts that bear on Form 8938, and facts that bear on Forms 3520 and 3520-A.
1CrystallizeWrite 1 sentence explaining, in your own words, why reporting a foreign account is a duty separate from paying tax on its income.

Fact check

Dates, figures and claims checked against the published sources listed below.

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