FBAR and FATCA for Cook Islands trust accounts

What FBAR requires

FinCEN Form 114, known as the Report of Foreign Bank and Financial Accounts, has to be submitted by any US person holding a financial interest in, or signature authority over, one or more foreign financial accounts whose combined value tops $10,000 at any moment in the calendar year. An account of a Cook Islands trust owned by a US grantor trust owner falls within this rule. Rather than going to the IRS, the FBAR is submitted electronically to the Financial Crimes Enforcement Network. The deadline is April 15, with an automatic extension running to October 15.

What counts as a financial interest reaches well beyond outright ownership. A US person is deemed to hold a financial interest in a foreign account when they are the record owner or hold legal title, and also when someone else maintains the account on that US person's behalf. Where a grantor trust settlor is regarded as the trust's owner, that settlor holds a financial interest in the trust's foreign accounts for FBAR purposes.

What FATCA requires

Under the Foreign Account Tax Compliance Act, US persons must disclose specified foreign financial assets on Form 8938, the Statement of Specified Foreign Financial Assets, which accompanies their personal income tax return. These thresholds sit above the FBAR level: a single filer reports at $50,000 held at year end or $75,000 reached at any time during the year, and the figures rise for married filers and for US persons resident overseas.

For FATCA, a Cook Islands trust counts as a specified foreign financial asset whenever the grantor trust rules treat the settlor as owning the trust. The figure disclosed is the value of the trust's assets. When the same account triggers both an FBAR and a Form 8938, each filing must be made separately, because completing one does not discharge the duty to complete the other.

How they interact

Running side by side, FBAR and FATCA differ in their overseeing agency, their forms, their thresholds, and how their penalties are structured. FBAR kicks in at the lower $10,000 mark and goes to FinCEN, whereas FATCA starts at the higher $50,000-and-up level and goes to the IRS. The very same Cook Islands trust accounts fall under both. A CPA handling foreign trust filings takes care of both, together with Forms 3520 and 3520-A, as one full annual compliance package.

The penalty regimes

For non-wilful FBAR breaches, the penalty can reach $10,000 per violation. A wilful breach carries whichever is greater of $100,000 or 50 percent of the account balance for each violation, and may lead to criminal prosecution. Because courts have treated every year left unfiled as its own separate violation, failing to file FBAR on a large account over several years can generate total penalties well beyond what the account itself is worth.

Penalties on FATCA Form 8938 begin at $10,000 for a failure to disclose, then climb by a further $10,000 for every 30-day stretch that non-disclosure continues once the IRS gives notice, capped at $50,000. On top of that, where the non-disclosure leads to underpaid tax, a further 40 percent penalty applies to the portion of the underpayment tied to the undisclosed foreign financial assets.

This is general information only. The FBAR and FATCA regimes are intricate and the penalties are harsh. Verify exactly what applies to you with a CPA, and where wilful non-compliance may be an issue, involve a tax attorney too.