Reporting Foreign Accounts on the FBAR versus Form 8938

Differences, Similarities, and Traps to Avoid

Usman Mohammad, JD

Because U.S. taxpayers are required to report and pay taxes on their worldwide income, the U.S. government has fought to compel taxpayers to report their interests in overseas bank accounts. In the 1970s, the FBAR (Report of Foreign Bank and Financial Accounts) was created as part of the Bank Secrecy Act. The form requires the reporting of a taxpayer's foreign accounts, and its purpose is to discourage tax evasion committed through the use of unreported foreign accounts. Yet in 2007, UBS banker Bradley Birkenfeld disclosed to the U.S. government that UBS was assisting large numbers of U.S. taxpayers in evading their U.S. tax obligations through the use of undisclosed Swiss bank accounts. The IRS thereafter began scrutinizing UBS and other Swiss banks over secret Swiss accounts held by U.S. taxpayers, scrutiny that quickly spread to foreign banks located in other jurisdictions such as Israel, India, and the Caribbean. Beginning in 2009, the United States began using a carrot-and-stick approach with U.S. taxpayers regarding the issue of undisclosed foreign bank accounts. The government combined criminal prosecutions by the Department of Justice (the stick), with a formal IRS voluntary disclosure program that precluded criminal prosecution if a taxpayer voluntarily came forward, disclosed his foreign accounts, and paid back taxes and a penalty based on the value of the foreign accounts (the carrot).