For U.S. persons, especially startup founders with international backgrounds or business operations extending beyond U.S. borders, understanding foreign asset reporting is absolutely crucial. The U.S. government has a keen interest in ensuring its citizens and residents declare all their income and assets, wherever they are located. Two key forms often cause confusion: the FBAR (FinCEN Form 114) and Form 8938 (Statement of Specified Foreign Financial Assets).
While both relate to reporting foreign assets, they serve different purposes, have different thresholds, and are filed with different agencies. Navigating these requirements accurately is paramount for legal compliance and avoiding severe penalties that can impact your financial health and startup growth.
🏦 What is the FBAR?
- Full Name: Foreign Bank and Financial Accounts Report (FinCEN Form 114).
- Purpose: Primarily an anti-money laundering and anti-terrorism financing tool. It helps the U.S. Treasury track illicit financial activities.
- Who Files: Any U.S. person (which includes U.S. citizens, resident aliens, and entities formed under U.S. law like C-Corps, LLCs, and partnerships) who has a financial interest in, or signature authority over, one or more foreign financial accounts if the aggregate value of all those foreign financial accounts exceeds $10,000 at any time during the calendar year.
- What Accounts: This specifically covers foreign financial accounts such as bank accounts (checking, savings), securities accounts (brokerage accounts), mutual funds, foreign-issued life insurance or annuity policies with cash value, and certain foreign retirement accounts.
- Where Filed: Directly with the Financial Crimes Enforcement Network (FinCEN) through their BSA E-Filing System. It is NOT filed with your IRS tax return.
- Deadline: April 15 of the following calendar year, with an automatic extension to October 15.
- Penalties: Non-compliance can lead to very steep civil and even criminal penalties. Non-willful violations can result in penalties up to $15,612 per violation, while willful violations can lead to fines of over $156,110 or 50% of the account balance (whichever is greater), plus potential criminal charges.
💵 What is Form 8938 (Statement of Specified Foreign Financial Assets)?
- Part of: The Foreign Account Tax Compliance Act (FATCA), enacted to detect U.S. persons holding financial assets offshore and avoiding U.S. taxes.
- Who Files: Generally, U.S. individuals (citizens and resident aliens) who have an interest in specified foreign financial assets and meet specific reporting thresholds. Certain domestic entities might also need to file under specific circumstances.
- Thresholds: These are significantly higher than for the FBAR and vary based on your tax filing status and whether you reside in the U.S. or abroad. For example:
- Single filers residing in the U.S.: Aggregate value of specified foreign financial assets exceeding $50,000 on the last day of the tax year or $75,000 at any time during the tax year.
- Married filing jointly residing in the U.S.: Aggregate value exceeding $100,000 on the last day of the tax year or $150,000 at any time during the tax year.
- What Assets: This form has a broader scope than the FBAR. It includes foreign financial accounts (like FBAR), but also other specified foreign financial assets that are not held in an account, such as foreign stock or securities not held at a financial institution, foreign partnership interests, foreign mutual funds, foreign-issued life insurance or annuity contracts, and foreign real estate held through a foreign entity (like a foreign corporation or partnership).
- Where Filed: With your IRS tax return (e.g., Form 1040).
- Deadline: Same as your federal tax return (typically April 15, with extensions).
- Penalties: Failing to file or providing incomplete information can result in a $10,000 penalty, with additional penalties for continued failure to file after being notified by the IRS.
⚖️ FBAR vs. Form 8938: Key differences & overlaps
It's critical to understand that these are not mutually exclusive. Many U.S. taxpayers will need to file both the FBAR and Form 8938. Here's a breakdown of their key distinctions:
- Purpose:
- FBAR: Primarily an anti-money laundering and anti-terrorism financing tool.
- Form 8938: Part of FATCA, designed to detect U.S. persons avoiding U.S. taxes by holding financial assets offshore.
- Filing Agency:
- FBAR: Filed directly with FinCEN (Financial Crimes Enforcement Network).
- Form 8938: Filed with the IRS, as part of your annual tax return.
- Who Files:
- FBAR: Required for U.S. persons, which includes both individuals (citizens, resident aliens) and entities (e.g., C-Corps, LLCs, partnerships).
- Form 8938: Primarily required for U.S. individuals (citizens and resident aliens) who meet specific thresholds.
- Thresholds:
- FBAR: A lower aggregate value threshold (over $10,000 at any point during the year).
- Form 8938: Higher thresholds that vary based on your tax filing status and residency (e.g., typically over $50,000 at year-end for single filers in the U.S.).
- Scope of Assets Covered:
- FBAR: Covers foreign financial accounts (e.g., bank, brokerage accounts).
- Form 8938: Has a broader scope, including foreign financial accounts plus other specified foreign financial assets not held in accounts (e.g., direct holdings of foreign stock, foreign partnership interests, certain foreign real estate).
- Penalties:
- FBAR: Can be very severe, including non-willful and willful penalties that can reach tens or hundreds of thousands of dollars, or a percentage of the account balance.
- Form 8938: Significant, with an initial $10,000 penalty for failure to file, and additional penalties for continued non-compliance.
- Relation to Tax Return:
- FBAR: It is not a tax form itself; it's filed separately from your IRS tax return.
- Form 8938: It is an IRS tax form and must be filed with your tax return.
🚀 Why this is critical for startup founders and U.S. entities
For international startup founders who have established a US entity, this distinction is paramount.
- You, as a U.S. person (if you are a U.S. citizen or resident alien), may have personal foreign accounts/assets requiring both FBAR and Form 8938.
- Your US entity (e.g., a C-Corp or LLC) might have its own foreign financial accounts, requiring it to file an FBAR. If your US entity has foreign subsidiaries, there are other separate reporting obligations like Form 5471 or Form 5472.
- Failure to meet these federal filings obligations can lead to draconian penalties that can severely impact your financial health and ability to raise funding. During due diligence, investors will look for a clean record of tax compliance.
These are complex rules, and missing reporting deadlines or misinterpreting the asset definitions can have dire consequences.
Let Lazo clarify your foreign asset reporting obligations
Navigating the complexities of FBAR and Form 8938 can be daunting, especially when you're focused on building and scaling your startup. Don't risk severe IRS penalties or create red flags for investors due to incomplete or incorrect foreign asset reporting. Our Lazo experts specialize in U.S. tax compliance for startup founders and US entities with international connections. We provide tailored expert guidance to help you understand your specific obligations, accurately prepare all necessary federal filings, and ensure your legal compliance every step of the way.
Ready to ensure flawless foreign asset reporting and secure your financial future?
.jpg)
.jpg)
.jpg)
.jpg)
