Snakes and spiders
Where I grew up we kids were warned about two poisonous creatures, rattlesnakes and black widow spiders. Rattlers were obviously scary, but they gave you some warning with their vibrating, rattling tails. Black widows were largely invisible and silent, but their venom caused persisting, serious symptoms.
Like most kids I saw evidence of rattlesnakes, mostly in the form of highway roadkill. Most of us had seen rattles that had been cut from dead snakes. In Scouts we were warned not to step over a rock without first seeing what was on the other side. A snake dozing there might not warn you with a tail shake before striking.
I first encountered a live rattler when hiking at the age of 15 and quickly walked away. I didn’t know anyone who had ever been bitten, but a snake-bit kit was required gear for Boy Scout hikes.
There were no bite kits for black widows, and no kid I knew had ever knowingly seen a black widow. That changed at 17, when I was working a summer job at a swimming pool. I nearly stumbled on one in a dark, dusty corner of the rarely visited pool pump shed. The red hourglass clinched its identification. I wasn’t in danger, but my heart rate raced when I saw this almost mythical threat.
Rattlesnakes and black widow spiders aren’t found where I now live in Canada, However, there are some expat financial dangers that parallel those of the scary creatures of my childhood.
The rattlesnake: US income tax
One financial danger for most American expats is the need to file a US income tax return – even if one’s income is entirely from outside the US!
Needing to file a US tax return greatly complicates expat life because you must serve two tax masters (file in 2 countries). That results in much higher tax preparation costs even if no double taxation is involved.
It’s a bad idea to skip US tax filing for two reasons.
Late US income tax payment leads to penalties that accrue and increase each month up to a maximum 25% of your unpaid taxes.
If you ever move back or travel to the States, you may be asked, “Where have you been and why haven’t you filed for all these years?” Guess what happens then.
US income taxes are certainly a financial danger to expats, but one usually hears some warning rattles first.
A far less well-known expat financial threat is a lot like the reclusive black widow. It hides in dusty corners of the Web, is easily overlooked, and is potentially very dangerous.
The black widow spider: FBAR
The Foreign Bank Account Report is a Dept of Treasury form that demands details about foreign financial accounts from any American who has one or more of them. FBARs are not about income, but about accounts, where they are, and how much is in them.
Most Americans, living as they do in the US, have no need for foreign accounts, and FBARs are essentially irrelevant. But they are highly relevant for Americans living abroad, who need financial accounts where they reside.
Despite the acronym, FBARs are not just about bank accounts. They also cover brokerage accounts, insurance policies with cash value, joint accounts of all sorts, and business accounts over which one has signing authority over other people’s money.
Basically you need to report any foreign account with your name attached that smells like money and has a number on it. The online FBAR filing report is due annually on the same day that your US income tax return is due.
The FBAR is like income tax in one way: both have thresholds below which you don’t have to file. For example, If you’re single, under 65, and have an income of less than $12,950, you don’t have to file an income tax form.
You must file an FBAR if the sum of the yearly maximum amounts in all your foreign accounts exceeds US$10,000. That threshold is lower than you think because it’s based on the sum from many types of financial accounts, and double counting happens whenever money moves from one account to another.
For each qualifying account you must provide account details that include institution details, account number, and the maximum amount during the calendar year.
Because there’s no bill to be paid when you file, it’s tempting to think the FBAR is unimportant. That's a mistake that, like the bite of a black widow, could cause extreme pain.
FBAR origin story
The FBAR was created to be a crime-fighting tool to protect “...the U.S. financial system from abuse by money launderers, drug traffickers, sanctioned oligarchs, and other criminals''. Not a criminal? FBARs still apply to you.
FBARs live in a US Treasury unit called the Financial Crimes Enforcement Network (FinCEN).
To see FinCEN’s pre-occupations, look at what they put on their website news page recently.
FinCEN’s anti-crime pre-occupation may not be directed at the law-abiding expat, but its consequences still apply.
A core FinCEN strategy is to follow the money. Want to know about a suspect’s foreign money? Get the details about where it’s stashed. That’s the motivation for the FBAR.
There’s no intrinsic reason for giving your financial info to FinCEN via the FBAR. So how does FinCEN encourage compliance? Serious penalties. Incidentally, FinCEN’s sister department, the IRS, handles penalty collection.
FBAR’s Non-compliance Penalties
The FinCEN penalty regime is captured by the phrase: Holy sh*t!
FBAR noncompliance penalties range from awful to unbelievable.
Noncompliance is, in essence, not filing a timely FBAR every year that your foreign financial account total exceeds the $10K threshold.
Didn’t file because you never heard of an FBAR? Doesn’t matter; that’s what FinCEN calls “non-willful non-compliance”. In 2022 the penalty for non-willful noncompliance was $14.5K!
It’s possible that a penalty will be lowered, but do you really want to take that risk?
What if your accounts totaled >$10k and you knowingly chose not to file?
That would be “willful non-compliance”, which has a minimum penalty of $114.5K! This absurd penalty can be reduced under some circumstances.
Implication
FBAR non-compliance penalties are wildly disproportionate to the “crime”. They make one gasp. That’s why it’s crucial that American expats understand the FBAR and the implications of non-compliance.
Accidental American? Unsure of your US citizenship status? Don’t rush out to file an FBAR. You need to get expert immigration legal advice before you bring yourself to the attention of FinCEN or the IRS.
In my next newsletter, I’ll write more about FBARs, delinquent filing, and steps you can take.
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