For many years now France has consistently been one of the top five countries for my offshore voluntary disclosure cases. One of the top reasons for such an extensive noncompliance is the fact that the US tax reporting requirements are very diverse and easy to violate by a US owner of French bank and financial accounts. In this article, I will discuss the top three of such French bank accounts US tax obligations.
French Bank Accounts US Tax Obligations: Definition of US Owner
Our first point of departure is to define the term “US owner”. I use this phrase to refer to US citizens, US permanent residents and individuals who satisfied the Substantial Presence Test requirements. Note that such persons are generally US tax residents for income tax purposes, unless an exception applies.
French Bank Accounts US Tax Obligations: Two Sets pf Reporting Requirements
A US owner of French bank accounts potentially faces two large sets of US tax reporting requirements: income tax reporting requirements and US information returns. Some of these requirements may be overlapping and even duplicative. It is important for a US owner of French bank accounts to remember that he may need to comply with both sets of requirements. Complying with just one is not enough.
French Bank Accounts US Tax Obligations: Income-Reporting Requirements
Let’s start with the first important reporting requirement concerning French Bank accounts: income tax reporting requirements. If the US owner of French bank accounts is a US tax resident for income tax purposes, then he must disclose his worldwide income on his US tax returns. Of course, this includes any income generated by his French bank accounts.
The US owner must disclose his income from foreign bank accounts irrespective of whether he lives in the United States or outside of the country, whether this income is brought to the United States or if it continues to accumulate in his foreign bank accounts and whether the owner already paid French taxes on this income or not. The main rule is that, as long as you are a tax resident of the United States, you must comply with the worldwide income reporting requirement.
This requirement applies to all reportable income as determined by US tax rules. I want to emphasize this point: the worldwide income reporting rule requires US tax residents to disclose all of their foreign income deemed reportable under the US tax rules, not the French rules. Since there are huge differences between the French tax code and the US Internal Revenue Code, there are a lot of potential tax traps for US taxpayers with French bank and financial accounts.
French Bank Accounts US Tax Obligations: Assurance Vie Accounts
Probably the most common tax trap that illustrates well the differences between US tax rules and French tax rules are Assurance Vie accounts. They are very common among French citizens and non-taxable (except certain social taxes) until there is a withdrawal from the account. US tax rules completely disregard the preferential tax treatment of the French government. Instead, the IRS taxes Assurance Vie accounts as just an investment account. Since at least a part of each Assurance Vie account is usually invested in foreign mutual funds, the result is that the US owners of this type of an account are very likely to have extensive and expensive PFIC compliance issues.
French Bank Accounts US Tax Obligations: FBAR
The most important asset reporting requirement that applies to US taxpayers with French bank accounts is FinCEN Form 114, the Report of Foreign Bank and Financial Accounts, commonly known as “FBAR”. As long they meet the filing threshold (see below), US taxpayers are required to disclose all of their French bank accounts over which they have signatory authority or in which they have a financial interest (i.e. they own an account directly or indirectly, either individually or jointly).
FBAR is a unique information return. The anomaly begins with the fact that FBAR is not technically a tax form, but a BSA form which has been administered by the IRS since the year 2001. This is why FBAR is not filed together with the tax return but has to be e-filed separately through BSA website.
Second, FBAR also has a very low filing threshold – just $10,000. Moreover, this threshold is determined by taking the highest balances during a calendar year of all of the taxpayer’s foreign accounts (even if these accounts are located in a foreign country other than France) and adding them all up. Sometimes, this results in significant over-reporting of a person’s actual balances, which easily satisfies the reporting threshold.
Finally, FBAR has very severe noncompliance penalties. Its penalties range from non-willful penalties (i.e. potentially a situation where a person simply did not know about FBAR’s existence) to extremely high civil willful penalties and even criminal penalties. In other words, in certain circumstances, FBAR noncompliance may result in actual jail time.
French Bank Accounts US Tax Obligations: FATCA Form 8938
While a relative newcomer, FATCA Form 8938 quickly occupied a special place in US international tax compliance. It may appear that Form 8938 duplicates FBAR with respect to foreign bank account reporting, but there are very important differences between these forms. Let’s focus on the top five differences.
First, unlike FBAR, the taxpayer files Form 8938 together with his US tax return. This means that the Form 8938 noncompliance may keep the statute of limitations open on the filer’s entire tax return indefinitely, thereby potentially subjecting it to an IRS audit indefinitely.
Second, there are differences between FBAR and Form 8938 concerning foreign account information that one needs to disclose on these forms. Form 8938 forces US taxpayers to disclose not only most of the information that is required to be reported on FBAR, but also such details as whether an account was opened or closed in the reporting year, whether it produced any income, how much income was produced, et cetera. This may give the IRS additional information necessary to determine if there was prior tax noncompliance with respect to these accounts.
Third, there are important substantive differences between these two forms with respect to what accounts have to be disclosed. For example, signatory authority accounts must be disclosed on FBAR, but Form 8938 has no such requirement. On the other hand, a paper bond certificate may not need to be reported on FBAR, but it must be disclosed on Form 8938. In general, Form 8938 is likely to apply to a wider range of French assets than FBAR; this is why Form 8938 is often called the “catch-all” form.
Fourth, while FBAR penalties can be extremely severe, Form 8938 sports its own arsenal of formidable noncompliance penalties. In fact, in a non-willful situation, Form 8938 penalties may have an equivalent or even larger impact due to the fact that they have a much broader and affect even the income tax penalties. For example, Form 8938 noncompliance may lead to higher accuracy-related penalties with respect to income-tax noncompliance. Form 8938 penalties may also impact a taxpayer’s ability to utilize foreign tax credit.
Finally, unlike FBAR, Form 8938 comes with a third-party FATCA verification mechanism. Under FATCA, the IRS should receive foreign-account information not only from taxpayers who file Forms 8938, but also from their foreign financial institutions (“FFIs”). This means that it is much easier for the IRS to identify Form 8938 noncompliance than FBAR noncompliance (although, a FATCA-based disclosure by the FFIs may also lead to a fairly fast discovery of FBAR noncompliance).
Contact Sherayzen Law Office for Professional Help with Your French Bank Accounts US Tax Obligations
If you are a US Person who has undisclosed French bank accounts, contact Sherayzen Law Office for professional help as soon as possible. We have helped hundreds of US taxpayers around the globe to resolve their past FBAR and FATCA noncompliance, including with respect to financial accounts in France. We can help you!
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