FBAR and 8938: the filings American founders discover late

This article is for US citizens and green card holders living outside the United States. If you are a non-US founder who owns a US LLC, your obligations are different and mostly narrower — they are set out in what a non-resident with a US LLC actually owes the IRS.

The recurring misunderstanding is a reasonable one. A US founder abroad works out that the foreign earned income exclusion and the foreign tax credit reduce the US tax to nothing, concludes correctly that nothing is owed, and concludes incorrectly that nothing is due.

These are reporting obligations, not tax obligations. They are triggered by holding things, not by owing anything, and their penalties are calculated per unfiled form rather than as a percentage of tax. A founder with a zero tax liability can accumulate a five-figure penalty exposure without a single dollar of tax ever having been due.

FBAR

Filed with FinCEN rather than the IRS, on FinCEN Form 114, electronically. It is due with the tax return deadline and carries an automatic extension to October without needing to request one.

You file if you are a US person with a financial interest in, or signature authority over, foreign financial accounts whose aggregate value exceeded $10,000 at any point in the calendar year.

Every part of that sentence is narrower than founders assume, so it is worth taking apart.

• Aggregate, not per account. Six accounts holding $2,000 each is $12,000 and you file. People with several small accounts routinely believe they are under the threshold.
• At any point, not at year end. A payment that passed through and left again still counted while it was there. The test is the maximum value during the year.
• Signature authority counts. A founder who is a signatory on a foreign company's account has an account to report even with no ownership interest in it whatsoever. This is the most-missed limb.
• Foreign means non-US. An account with a US bank's overseas branch is foreign for this purpose; the geography of the branch is what matters.
• "Financial account" is broad. Bank accounts, brokerage, certain pooled funds, some pensions and some insurance products with cash value.

Form 8938

A different statute, a different agency, a different threshold, and a different scope. It is filed with your income tax return rather than separately, and reports specified foreign financial assets.

The thresholds depend on filing status and, crucially, on whether you live abroad — the overseas thresholds are four times the domestic ones, which is why many founders abroad file an FBAR and no 8938.

Which one, and usually both

They overlap without being duplicates, and filing one has no effect on the requirement to file the other. Most founders abroad with a foreign business account and modest savings cross the FBAR threshold and not the 8938 one.

The four that carry $10,000 each

FBAR and 8938 get the attention. These get discovered, and each carries a penalty starting around $10,000 per form per year.

• Form 5471 — for a US person who is an officer, director or significant shareholder of a foreign corporation. A US founder who incorporated in their country of residence almost certainly has one of these, and almost certainly did not know. Where the company is controlled, the CFC rules also bring its income into charge.
• Form 8865 — the same idea for interests in foreign partnerships.
• Form 3520 and 3520-A — foreign trusts, and large gifts or inheritances from foreign persons. Some perfectly ordinary foreign pension and savings vehicles are treated as trusts, which catches people who have never been near a trust in their lives.
• Form 926 — transfers of property to a foreign corporation, including a founder capitalising their own overseas company.

Fixing several unfiled years

There is a designed route for exactly this situation, and its central condition is that your failure was non-willful — negligence, inadvertence, or a genuine misunderstanding, rather than a decision to conceal.

The streamlined filing compliance procedures come in two forms. For a taxpayer who meets the non-residency condition — broadly, genuinely living abroad — the foreign version requires three years of amended or delinquent returns, six years of FBARs, and a signed certification of non-willfulness, and imposes no miscellaneous offshore penalty. The domestic version, for those who do not meet that condition, carries a penalty calculated on the highest aggregate balance.

Where the only failure is FBARs and all income was properly reported, there is a narrower delinquent-FBAR route that is simpler again.

1. 1Establish the facts before choosing a route. Which years, which accounts, which entities, what was reported. The route depends on the answer and the answer determines the cost.
2. 2Come forward before you are contacted. Every one of these procedures is available only to taxpayers who are not already under examination. This is the single most valuable thing in this article.
3. 3Take advice on the non-willfulness certification. It is signed under penalties of perjury and it is the document the whole submission rests on.
4. 4Do it in one submission. Filing a single quiet amended return without addressing the pattern is a well-known approach and a poorly-regarded one.

The standing position

1. 1File a US return every year you are a citizen or green card holder, wherever you live, and whatever the tax comes to.
2. 2Track the maximum balance of every foreign account through the year, not the closing one.
3. 3Include accounts you merely sign on, including your own company's.
4. 4If you own or direct a foreign company, establish which international form applies before the year ends rather than after.
5. 5Remember that the earned income exclusion removes income tax and not the self-employment charge — see social security across borders.
6. 6Keep the filed forms. The certification you may need one day is about the whole period, not the current year.

The unifying point is worth stating once more, because it is the one that produces the surprise: none of this is about tax. It is about disclosure, it applies at zero liability, and it is priced per form.