23.2 International Asset Reporting: FinCEN Form 114 (FBAR) vs. Form 8938 (FATCA) Compliance & Penalties

The Dual International Compliance Framework: Title 31 vs. Title 26

United States taxpayers with foreign financial assets are subject to two separate, overlapping statutory reporting regimes governed by entirely different federal titles, administrative bodies, and legal objectives:

1. Title 31 (Money and Finance / Bank Secrecy Act): Administered by the Financial Crimes Enforcement Network (FinCEN), a bureau of the Department of the Treasury. The primary compliance instrument is FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Its purpose is law enforcement, anti-money laundering, and tracing illicit foreign fund flows.
2. Title 26 (Internal Revenue Code / Foreign Account Tax Compliance Act - FATCA): Administered by the Internal Revenue Service (IRS). The primary compliance instrument is Form 8938, Statement of Specified Foreign Financial Assets. Its purpose is detecting tax evasion and ensuring full reporting of foreign taxable income.

[!IMPORTANT] Critical Exam Distinction: Filing Form 8938 with Form 1040 does NOT satisfy the obligation to file an FBAR, and filing an FBAR electronically with FinCEN does NOT satisfy the obligation to file Form 8938. Many taxpayers are legally required to file both forms annually.

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FinCEN Form 114 (FBAR): Statutory Scope & Rules

Under 31 U.S.C. §5314 and 31 C.F.R. §1010.350, a United States person must file an FBAR if:

1. The person had a financial interest in, or signature or other authority over, at least one financial account located in a foreign country; and
2. The aggregate maximum value of all foreign financial accounts exceeded $10,000 at any time during the calendar year being reported.

The Aggregate Value Rule

The $10,000 threshold is an aggregate test, not a per-account test. To determine whether the threshold is met, the taxpayer must convert the maximum balance of each foreign account during the calendar year into U.S. dollars using the Treasury Reporting Rates of Exchange for December 31 of that year, and add them together:

Example: An individual owns three foreign accounts during 2025:

• Account A (Switzerland): Maximum balance $5,000
• Account B (Germany): Maximum balance $4,000
• Account C (Canada): Maximum balance $2,500

The aggregate maximum value is $11,500 ($5,000 + $4,000 + $2,500). Because $11,500 exceeds $10,000, all three accounts must be reported on the FBAR, even though no single account exceeded $10,000.

Who Is a "United States Person"?

A U.S. person includes:

• U.S. citizens
• Lawful permanent residents (green card holders)
• Resident aliens under the Substantial Presence Test (IRC §7701(b))
• Domestic corporations, partnerships, limited liability companies (LLCs), trusts, and estates created or organized under U.S. laws.

Reportable Accounts vs. Non-Reportable Assets

• Reportable Financial Accounts: Commercial bank accounts, checking/savings accounts, brokerage/securities accounts, commodity/futures accounts, foreign mutual funds, foreign pooled investment funds, and foreign life insurance or annuity contracts with a cash surrender value.
• Financial Interest vs. Signature Authority:
  • Financial Interest: Owner of record, legal title holder, or beneficial owner. Includes owning >50% of the voting stock or capital value of a foreign corporation, partnership, or trust that holds foreign accounts.
  • Signature or Other Authority: The authority of an individual (alone or in conjunction with another) to control the disposition of money, funds, or other assets held in a financial account by direct delivery of instructions to the financial institution (e.g., corporate officers or employees authorized to sign on foreign corporate accounts must file an FBAR reporting those accounts, even with zero personal financial interest).
• Non-Reportable Assets on FBAR:
  • Foreign real estate held directly in the individual's name
  • Foreign currency physically held by the individual
  • Precious metals, jewelry, or artwork held directly in personal possession or in a private safe deposit box
  • Accounts held at U.S. military banking facilities operated by U.S. financial institutions abroad
  • A foreign account holding only virtual currency: under FinCEN Notice 2020-2 it is not currently reportable on the FBAR (FinCEN has announced plans to change this), although a foreign account holding virtual currency along with other reportable assets is reportable, and foreign digital-asset holdings can still count toward Form 8938.

FBAR Filing Mechanics

• Due Date & Automatic Extension: The FBAR is filed on a calendar-year basis and is due April 15. An automatic 6-month extension to October 15 is granted to all filers. No specific extension form or request is required.
• Electronic BSA Filing: FinCEN Form 114 must be filed electronically through FinCEN's BSA E-Filing System. It is never attached to Form 1040, cannot be mailed on paper (except under narrow disability waivers), and is not processed by IRS tax return intake.

FBAR Penalties Post-Bittner v. United States

Penalties for failing to file an FBAR are among the most severe in federal law:

• Non-Willful Violations: For non-willful failures, civil penalties up to $10,000 per violation (indexed for inflation under the Federal Civil Penalties Inflation Adjustment Act; adjusted over $16,000 in recent years) may be assessed.
  • The Bittner Landmark Ruling (2023): In Bittner v. United States (143 S. Ct. 713), the U.S. Supreme Court resolved a circuit split by ruling that the non-willful FBAR penalty applies per annual report (per form), NOT per foreign account! If a non-willful taxpayer failed to file an FBAR reporting 20 foreign accounts in a single year, the maximum non-willful penalty is one statutory report penalty, not 20 separate penalties.
• Willful Violations: If the violation is willful (intentional disregard or reckless indifference), civil penalties equal the greater of $100,000 (indexed for inflation; over $160,000) OR 50% of the maximum account balance at the time of the violation, assessed per account, per year! Criminal penalties can reach $250,000 in fines and up to 5 years imprisonment (or up to $500,000 and 10 years if combined with other felonies).

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Form 8938 (FATCA): Specified Foreign Financial Assets

Enacted under the Foreign Account Tax Compliance Act (FATCA) and codified in IRC §6038D, Form 8938 must be attached to the taxpayer's annual federal income tax return (Form 1040) if the aggregate value of Specified Foreign Financial Assets (SFFAs) exceeds statutory dollar thresholds.

Scope of Specified Foreign Financial Assets

Form 8938 is significantly broader than the FBAR because it encompasses both foreign financial accounts and foreign non-account investment assets:

1. Foreign Financial Accounts: Accounts maintained by foreign financial institutions (same as FBAR).
2. Other Foreign Financial Assets (Held for Investment outside an account):
   • Stock or securities issued by a non-U.S. corporation
   • Capital or profits interests in a foreign partnership
   • Any financial instrument or contract that has an issuer or counterparty that is a non-U.S. person (e.g., foreign promissory notes, foreign bond certificates, foreign derivatives)
   • Interests in a foreign trust, foreign estate, or foreign pension plan.

Assets Excluded from Form 8938: Directly held foreign real estate, foreign currency held physically, tangible personal property (cars, art, antiques), and assets held in an account at a U.S. financial institution (such as a foreign stock held inside a domestic Charles Schwab brokerage account).

Tiered Form 8938 Reporting Thresholds

Unlike the flat $10,000 FBAR threshold, Form 8938 establishes four distinct filing thresholds based on tax filing status and whether the taxpayer resides inside or outside the United States:

Definition of Living Abroad: A taxpayer qualifies for the higher abroad thresholds only if they satisfy the Bona Fide Residence Test or the Physical Presence Test (330 days) under IRC §911.

Penalties for Form 8938 Non-Compliance

• Failure-to-File Penalty (IRC §6038D(d)): An initial civil penalty of $10,000 per tax year.
• Continuation Penalty: If the failure continues for more than 90 days after the IRS mails a formal notice of failure, an additional $10,000 penalty applies for each 30-day period (or fraction thereof) of continuing failure, up to an additional maximum of $50,000 (total maximum civil failure penalty: $60,000 per return).
• 40% Accuracy-Related Penalty (IRC §6662(j)): A punitive 40% accuracy-related penalty (double the standard 20% penalty) is assessed on any tax underpayment attributable to an undisclosed foreign financial asset transaction.
• Statute of Limitations Extension (IRC §6501(c)(8)): If a taxpayer fails to file Form 8938 or omits a reportable asset, the assessment statute of limitations remains open indefinitely for the entire tax return until 3 years after the required information is furnished to the IRS (or 3 years with respect to items related to the failure if reasonable cause is established). Furthermore, under IRC §6501(e)(1)(B), omitting more than $5,000 of gross income attributable to foreign assets triggers an automatic 6-year assessment statute.

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Other International Information Returns (Forms 3520, 3520-A, 5471, 8865)

The Part 1 outline lists these returns by name. Each is an information return attached to (or filed alongside) the individual's return, carries its own penalty, and, like Form 8938, keeps the assessment statute open under IRC §6501(c)(8) until it is filed.

Exam pattern: A foreign gift is not taxable income to the U.S. recipient (IRC §102), but failing to report a $150,000 cash gift from a foreign grandparent on Form 3520 can cost up to $37,500 (25%). Receiving an inheritance from a nonresident alien is reported the same way, while a gift from a U.S. person is never reported by the recipient.

Substantially Incomplete Returns and Reduction of Tax Attributes

• Substantially incomplete is treated as not filed: The IRS treats a Form 5471 that omits or misstates material information as substantially incomplete. The failure-to-file penalty applies as if no form had been filed, and the IRC §6501(c)(8) extension keeps the assessment statute open until 3 years after a substantially complete Form 5471 is provided. Form 8865 is also filed under IRC §6038, and the Form 3520 penalty applies when the return is filed with incomplete or incorrect information (IRC §6677).
• Reduction of the foreign tax credit (IRC §6038(c)): In addition to the $10,000 penalty, a person who fails to file or report all of the information required on Form 5471 has the foreign taxes available for credit under IRC §§901 and 960 reduced by 10%. If the failure continues 90 days or more after the IRS mails a notice, an additional 5% reduction applies for each 3-month period, or part of one, that the failure continues. IRC §6038(c)(2) limits the reduction.
• Reasonable cause: Reasonable cause can excuse these penalties. For the statute of limitations, it limits the extension to the items related to the failure instead of the entire return.

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Comprehensive Matrix: FBAR (FinCEN 114) vs. FATCA (Form 8938)