Why is the IRS asking me for my Foreign Bank Account information?

After our first full tax year cycle, two recurrent questions most US expatriates taxpayers had for me were:

• Why the IRS is so interested in your foreign assets and accounts?
• What are the real differences between the Foreign Account Banking Report Form (aka FBAR) and the IRS FATCA form 8938?

A primary purpose of the FBAR filing is to track concealed money in foreign financial accounts used for unlawful purposes (e.g., tax evasion, money laundering or terrorism). Therefore, a tax return that, for instance, discloses a low foreign income relative to a high foreign bank account balances will potentially raise flags.

Now, one of the major frustrations about the FBAR (aka FinCen 114 reporting) and FATCA Form 8938 that is hard to ignore is the duplication of required information. As a CPA tax specialist, I am personally hoping that the few differences between the reports will be streamline to make the filing process less time consuming for the taxpayers and more cost-effective for the tax authorities. Here are some of the general differences between the forms:
• Tax versus Law Enforcement. This possibly will shock some of you, but the Form 8938 was intended to service tax administration, whereas the FBAR was designed to aid in law enforcement. Filing dates and administrative agencies are different, and the entire purpose of these forms as different. Does that introduction sound like you ought to plan on collecting the right information by year end so to ease the filing process? Yes, it does.
• FATCA is stricly a individual tax affair, while individuals and businesses have to file the FBAR if the requirements apply to them.
• Duplication. Yes, some of the information demanded on Form 8938 and FBARs is repetitive. Still, Form 8938 inquires for added information not required on an FBAR, including other foreign financial assets and income.
• Threshold: The bank and financial assets balances thresholds to file are much higher for Form 8938 than they are for the FBAR. You are generally required for balances of $10,000 and over for the FBAR, while the first balance threshold is $50,000 (or higher if living outside the US) for Form 8938.
• Let’s Wait. Once Form 8938 data is available, it seems likely that the IRS, FinCEN (which administers FBARs) and the Treasury Department will be able to weigh whether cost-effective measures could be taken. One of those measures in the future might (emphasizing might here!!!) include letting filers who would typically have to submit both forms to substitute the information reported on one to comply to the necessities of the other.
• Penalties. Finally, although the penalty structures are rather terrifying for both forms, they are also different in amount.