Legacy Law Blog

Foreign asset disclosure is one of the most misunderstood areas of U.S. tax law, especially for individuals and businesses just starting to build financial relationships outside the U.S.

Whether through global investment, overseas accounts or foreign business subsidiaries, knowing how to properly report these assets to the Internal Revenue Service (IRS) is essential for avoiding costly penalties and maintaining compliance.​

What Does Foreign Asset Disclosure Mean?

Foreign asset disclosure simply refers to the suite of IRS and U.S. Department of Treasury reporting requirements that apply when a U.S. person—citizen, resident or qualifying entity—holds financial assets or accounts outside the U.S.

The reason for these rules is straightforward: the U.S. taxes its citizens and residents on global income and wants transparency to prevent tax evasion using offshore accounts.​

Foreign asset reporting typically falls under two main systems:

• Report of Foreign Bank and Financial Accounts (FBAR)
• Foreign Account Tax Compliance Act (FATCA), using IRS Form 8938.​

Who Has to File?

All taxpayers that meet the definition of a U.S. person are required to annually disclose foreign assets to the IRS. A “U.S. person” can be:

• An individual (citizen or resident alien)
• A business entity (corporation, partnership, LLC, trust or estate formed under U.S. law).​

If a taxpayer has overseas financial accounts or assets that meet certain thresholds, reporting is mandatory. Failure to do so can lead to large penalties.

What Counts as a Foreign Asset or Account?

Not every overseas connection requires disclosure. To assist taxpayers with determining when they must report assets or accounts to the IRS, the service defines relevant assets as the following:

• Foreign checking, savings or investment accounts
• Stocks or securities issued by non-U.S. entities
• Foreign mutual funds, hedge funds and private equity funds
• Interests in foreign partnerships, corporations or trusts​

Simply holding a foreign asset or account is not enough to trigger a reporting requirement. Certain exclusions exist for some foreign assets such as:

• U.S.-based accounts in the foreign branches of U.S. financial institutions (often not considered “foreign” for these rules)​
• Interests in foreign social security programs
• Foreign real estate held directly (but not shares of foreign real estate investment trusts).​

Penalties for Non-Compliance

The IRS and Financial Crimes Enforcement Network (FinCEN) take the reporting requirement for foreign assets and accounts very seriously. They impose the following harsh penalties for failure to disclose:

• FBAR: Up to $10,000 per violation for non-willful failure; up to the greater of $100,000 or 50% of the account value for willful violations​
• Form 8938: $10,000 for failure to file, plus an additional $50,000 for continued delinquency and an additional 40% penalty on underreported income from undisclosed assets​
• Possible criminal penalties for willful evasion​

Core Forms and Requirements

FBAR (FinCEN Form 114)

The FBAR must be filed by any U.S. person who has a financial interest in, or signature authority over, foreign accounts whose total value exceeds $10,000 at any time during the calendar year.​

Accounts that contribute to the $10,000 annual value include:

• Bank accounts
• Securities accounts
• Retirement accounts
• Life insurance policies with cash value

The FBAR form is filed with FinCEN, not with the IRS, and it is submitted electronically through the BSA e-filing system.​

FATCA (Form 8938)

The IRS requires U.S. taxpayers holding certain foreign financial assets above specific thresholds to file Form 8938 with their federal tax return.​

Assets that fall under FATCA include:

• Foreign bank and brokerage accounts
• Foreign stocks and securities not held in an account with a U.S. financial institution
• Interests in foreign entities (corporations, partnerships, trusts)

The reporting thresholds for Form 8938 vary depending on filing status and whether the taxpayer lives in the U.S. or abroad. Individuals living in the U.S. must report foreign financial assets if they meet one of the following thresholds:​

• Unmarried or married filing separately: Total value of all foreign assets is more than $50,000 at the end of the year or $75,000 at any time during the year
• Married filing jointly: Total value of all foreign assets is more than $100,000 at the end of the year or $150,000 at any time during the year

For those living outside the U.S., thresholds are higher. Individuals living outside the U.S. must report foreign financial assets if they meet one of the following thresholds:

• ​ Unmarried or married filing separately: Total value of all foreign assets is more than $200,000 at the end of the year or $300,000 at any time during the year
• Married filing jointly: Total value of all foreign assets is more than $400,000 at the end of the year or $600,000 at any time during the year

Other Forms for Special Circumstances

In addition to the reporting requirements outlined above, certain situations demand additional reporting using the following forms:

• Ownership in a foreign corporation: Form 5471
• Interests in foreign trusts: Form 3520 or 3520-A​
• Foreign partnerships: Form 8865

Like foreign financial assets and accounts, failing to account for these assets correctly can lead to severe IRS penalties.

Businesses: Not Just an Individual Concern

Foreign asset reporting is not just for individuals. U.S. businesses—including corporations, LLCs and partnerships—must file the FBAR if they have a reportable financial interest in or authority over foreign accounts.​

Businesses may also be required to file Form 8938 if they are “specified domestic entities” formed to hold foreign assets. This includes certain domestic corporations, partnerships and trusts. Special rules apply if a business directly or indirectly owns more than 50% of another entity with foreign accounts, which will trigger the filing requirement.​

Regardless of whether the asset is under an individual’s name or the entity’s name, disclosure is mandatory once these thresholds are met.

Common Mistakes and How to Avoid Them

New filers often make several errors when they report foreign assets and accounts for the first time. The following are the most common errors made by taxpayers when meeting their filing requirements:

• Not recognizing that multiple accounts with modest balances can exceed reporting thresholds when totaled​
• Assuming business entities are exempt
• Failing to report signature authority over, rather than ownership in, a foreign account​
• Not keeping accurate records of maximum account balances and account details​

It’s essential to maintain thorough records and consult IRS instructions for the specific forms each year.​ By doing so, taxpayers can better respond to requests from the IRS or FinCEN.

How to Get Help

The reporting rules change often, and international reporting demands attention to detail. Qualified tax professionals and CPAs can assist with identifying relevant accounts, calculating value thresholds and completing the necessary filings. The IRS website also provides explanations, examples and updated forms for each reporting year.​

Conclusion

Foreign asset disclosure is a mandatory step for U.S. individuals and businesses with international accounts or investments. Filing the FBAR and FATCA forms accurately each year helps ensure compliance, protects against penalties and supports global financial transparency.

Whether dealing with a modest overseas bank account or complex multinational business interests, taking the time to understand and meet these requirements is critical for secure, legal participation in the global economy.