The ABA posted Foreign Asset Reporting and U.S. Territories where they discuss that Puerto Rico, American Samoa, Guam, The United States Virgin Islands, The Northern Mariana Islands—these are all United States territories or possessions. Individuals born in these territories are deemed by law to be either United States citizens or United States nationals. Yet these locations are separated from the contiguous United States by vast bodies of water. Many U.S. citizens from the contiguous United States have never been to any of the territories. Travel from the contiguous United States to any one of these territories involves a multiple-hour trip by either air or sea. In many ways, these locations seem foreign and exotic to most Americans.
The FBAR, Form 8938, Form 3520, Form 5471, Form 8621—these are all information reporting forms used to report various types of foreign assets to different bureaus within the U.S. Department of the Treasury, such as the Internal Revenue Service (the IRS) or the Financial Crimes Enforcement Network (FinCen). When most people think of “foreign” assets, they think of assets located in foreign countries, such as Switzerland, Israel, China, the United Kingdom, or Russia.
What about an asset, such as a bank account, located in a U.S. territory or possession? Is it a foreign or a domestic asset? The answer, unfortunately, is not so simple.An asset located in a U.S. territory or possession may or may not be considered “foreign” depending on the type of information reporting form. In addition, an individual’s residence in a U.S. territory or possession may impact whether or not they must report an asset located in that territory. This difference in treatment becomes most apparent when comparing the treatment of U.S. territories and possessions on the FBAR Form versus their treatment on Form 8938.
FBAR vs. Form 8938 Treatment of Financial Accounts Located in a U.S. Territory or Possession
The obligation to file Form 8938 depends on three factors:
(i) the filing status of the taxpayer;
(ii) the residence of the taxpayer; and
(iii) the aggregate value of the taxpayer’s specified foreign financial assets.
For example, an unmarried taxpayer residing in the United States must file Form 8938 if her specified foreign assets exceed $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
At the other end of the spectrum, married taxpayers residing outside the United States and filing a joint Form 1040 income tax return must file Form 8938 if their specified foreign assets exceed $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year.
In between there are various other threshold amounts for married taxpayers residing in the United States and either filing separately or jointly, unmarried taxpayers residing outside the United States, and married taxpayers residing outside the United States but filing separately.
Failure to file a Form 8938 may result in a $10,000 penalty, with an additional penalty of $10,000 for each 30-day period during which the Form 8938 is not filed, up to a maximum of $50,000. If the failure to disclose a specified foreign financial asset on Form 8938 also results in an underpayment of tax, then there is a 40 percent accuracy-related penalty on the underpayment.
With respect to a financial account located in a U.S. territory or possession, the asset will be reported differently on the two forms. For FBAR purposes, such an account is treated as a U.S. account and therefore does not need to be reported on the FBAR. That same account, however, is considered a foreign account for purposes of Form 8938 and must be reported on that form.
This difference in treatment can be traced to the different statutes that govern the FBAR and Form 8938. The obligation to file an FBAR is derived from Title 31 of the U.S. Code, specifically 31 U.S.C. § 5314, which requires U.S. persons to maintain records and file reports with respect to that person’s financial accounts held at a foreign financial institution. Title 31 deals with monetary instruments, including topics such as money laundering. The definition section of Title 31 defines the term “United States” as including U.S. possessions and territories.
(6) “United States” means the States of the United States, the District of Columbia, and, when the Secretary prescribes by regulation, the Commonwealth of Puerto Rico, the Virgin Islands, Guam, the Northern Mariana Islands, American Samoa, the Trust Territory of the Pacific Islands, a territory or possession of the United States, or a military or diplomatic establishment.
The practical effect of this definition is that U.S. territories and possessions are not deemed foreign for Title 31 purposes. As a result, a financial account in a U.S. territory or possession is deemed a United States-based account, and therefore does not need to be reported on the FBAR. This is confirmed by the FBAR regulations.
By contrast, the obligation to file Form 8938 is derived from Title 26 of the U.S. Code, specifically § 6038D. Title 26, of course, is the Internal Revenue Code that deals with topics related to the U.S. federal tax system. Title 26’s definition section defines the term “United States” as excluding U.S. possessions and territories.
(9) United States.--The term ‘United States’ when used in a geographical sense includes only the States and the District of Columbia.
The practical effect of this definition is that U.S. territories and possessions are deemed foreign for Title 26 purposes. Thus, a financial account in a U.S. territory or possession is deemed a foreign account and must be reported on Form 8938, a fact confirmed by the regulations governing Form 8938.
Because of these different statutory definitions, it appears that a legislative change may be needed to harmonize the FBAR and Form 8938 in their treatments of accounts based in U.S. territories. That said, the FBAR was first introduced in the 1970s, and Form 8938 was introduced in mid-2010.
There does not appear to be any legislative fix on the horizon for the differing manner in which these forms treat such accounts. Taxpayers and their professional advisers must therefore be mindful of the fact that accounts that do not need to be reported on the FBAR may nonetheless need to be reported on Form 8938.
For more regarding FBAR vs. Form 8938 Treatment of Residents of U.S. Territories or Possessions and the Treatment of U.S. Territories or Possessions on Other Information Reporting Forms see the ABA posted Foreign Asset Reporting and U.S. Territories.
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