Page 2 - Reporting Foreign Accounts on the FBAR versus Form 8938: Differences, Similarities, and Traps to Avoid

reported on that individual’s FBAR. For Form 8938 purposes, required to check Form 8938. One should not assume, however,
by contrast, only foreign accounts in which the taxpayer has a that this means that IRS examiners will ignore the FBAR reporting
direct ownership interest must be reported. Accounts in which the obligation when they observe that Form 8938 was filed. Instead,
taxpayer solely has a power of attorney or merely has signature per IRM 4.26.15.2 (“Required Filing Checks,” Nov. 4, 2015), the
authority do not need to be reported on Form 8938. In addition, IRS is looking out for incorrectly prepared Form 8938s, because
accounts in which the taxpayer has only an indirect interest (e.g., they believe this may also indicate possible FBAR violations.
through an entity) do not need to be reported on Form 8938.
Third, there are significant differences between the FBAR and Reporting Similarities between the FBAR and Form 8938
Form 8938 in terms of applicability to residents of U.S. territories Despite the aforementioned differences, there are several sim-
or possessions. The FBAR filing obligation applies to all “U.S. ilarities between the FBAR and Form 8938. Chief among them
persons,” and for FBAR purposes a U.S. person includes a bona is the fact that both the FBAR and Form 8938 use essentially
fide resident of any U.S. territory or possession. Thus, residents the same valuation criteria. Both the FBAR and Form 8938
of Puerto Rico, American Samoa, Guam, the U.S. Virgin Islands, require that the taxpayer set forth for each reported foreign
and the Northern Mariana Islands must all file FBARs if their account the “maximum” value in the account for the calendar
foreign accounts exceed $10,000 in value. For purposes of Form year based on periodic statements. Both forms require that those
8938, however, the issue is more complicated. An individual values be converted to U.S. dollars using end-of-year calendar
must file Form 8938 if they are deemed a “specified individual” exchange rates, and that the maximum value be reported in U.S.
whose specified foreign assets meet certain monetary thresholds. dollars. Given the foregoing, it appears that the value assigned
“Specified individual” includes residents of just two U.S. territo- to reported foreign accounts should match on both forms. As a
ries: Puerto Rico and American Samoa. But it does not include practical matter, to do otherwise may raise red flags with an IRS
individuals who are residents of other U.S. territories, such as examiner who has examined both Form 8938 and the FBAR.
Guam, the U.S. Virgin Islands, or the Northern Mariana Islands.
Fourth, there are meaningful differences in what qualifies as a Traps to Avoid
“foreign” account for purposes of the FBAR versus Form 8938. The following are just some examples of pitfalls to be mindful
For FBAR purposes, an account in a U.S. territory or possession of when dealing with foreign accounts, the FBAR, and Form 8938.
is treated as a U.S. account, and therefore does not need to be Failing to separately list on Form 8938 foreign accounts
reported on the FBAR. For Form 8938 purposes, however, an reported on the FBAR. Although Form 8938 provides that
account in a U.S. territory or possession is considered a foreign information reported on certain other foreign asset reporting
account and must be reported. Another example of a difference forms—such as Form 3520 (for reporting interests in foreign
between the two forms is a financial account held at a foreign trusts, gifts, and estates) and Form 5471 (for reporting interests
branch of a U.S. financial institution (e.g., a Chase account at in foreign corporations)—does not need to be repeated on Form
a branch in London). For FBAR purposes, such an account is 8938, there is no such exception for the FBAR. A taxpayer must
considered foreign and must be reported. But Form 8938 does separately list on Form 8938 all qualifying foreign accounts and
not treat such an account as foreign, and it does not need to be the maximum value of those accounts, even if that repeats infor-
reported on that form. mation that was separately reported on the FBAR.
Finally, there is a difference in how the two forms are submit- Not reporting small foreign accounts when there is a Form
ted and to whom. Although the FBAR form is now filed at the 8938 filing obligation but no FBAR obligation. If the reporting
same time as Form 1040, it is not filed with the tax return, nor is threshold for Form 8938 is met because of other foreign finan-
it even filed with the IRS. Instead, it is filed with the Financial cial assets (such as an interest in a foreign trust or corporation),
Crimes Enforcement Network (FinCen). Form 8938, by contrast, then the taxpayer must list every foreign bank account in which
is attached to, and considered a part of, an individual’s Form 1040; she has a direct ownership interest, no matter how small. For
thus, it is necessarily filed both at the same time as the tax return example, if the taxpayer has three small foreign bank accounts
and directly with the IRS. Although both FinCen and the IRS are holding $3,000 each—and the Form 8938 reporting obligation
bureaus within the U.S. Department of Treasury, there are prac- is triggered because of the value of the taxpayer’s other for-
tical consequence to the fact that the FBAR is filed with FinCen eign assets—then the taxpayer must report each of these small
and Form 8938 is filed with the IRS. In an audit or examination, foreign accounts on Form 8938, even if the taxpayer does not
an IRS agent will presumably always have access to a properly have to file the FBAR because the taxpayer’s foreign accounts
filed Form 8938 for the year under audit, as it is attached to and combined are below the $10,000 FBAR reporting threshold.
a part of the tax return. By contrast, the agent will not necessarily The taxpayer’s tax advisors should carefully perform a separate
start with access to the filed FBAR. Thus, the Internal Revenue analysis for Form 8938 and for the FBAR, rather than simply
Manual (IRM) expressly provides that income tax examiners are assuming that accounts do not need to be reported on one form
not required to check FBARs in an income tax audit, but they are if they are not reported on the other.

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