US International Tax Compliance and Dispute Resolution

The two most common foreign account reporting obligations are routinely confused, and the confusion is dangerous because they are separate filings with separate penalties. Filing one does not satisfy the other, and many taxpayers must file both for the same accounts in the same year.

The FBAR is FinCEN Form 114, the Report of Foreign Bank and Financial Accounts. A U.S. person — including citizens, green card holders, residents, and U.S. entities — must file an FBAR if the combined value of all foreign financial accounts exceeds $10,000 at any point during the calendar year. That is an aggregate threshold across all accounts, not a per-account test, and it includes accounts you merely have signature authority over, such as an employer account or an elderly parent's account you help manage. The FBAR is filed electronically with FinCEN through the BSA E-Filing System, not with your tax return, and is due April 15 with an automatic extension to October 15.

Form 8938 is the FATCA Statement of Specified Foreign Financial Assets, filed with your federal income tax return. Its scope is broader than the FBAR — it reaches not just accounts but other specified foreign financial assets such as directly held foreign stock, interests in foreign partnerships, and certain foreign pension interests. Its thresholds are higher and depend on filing status and residence. For taxpayers living in the United States, the filing trigger is foreign asset value above $50,000 on the last day of the year or $75,000 at any time (doubled to $100,000 / $150,000 for married filing jointly). For taxpayers living abroad, the thresholds rise to $200,000 / $300,000 (and $400,000 / $600,000 for joint filers).

The penalty exposure is what makes these filings a legal issue rather than a bookkeeping chore:

• Non-willful FBAR violations carry a civil penalty of up to $10,000, indexed annually for inflation (now over $16,000). Following the Supreme Court's 2023 decision in Bittner v. United States, the non-willful penalty applies per unfiled report, not per account — an important defense point in multi-account cases.
• Willful FBAR violations carry a civil penalty of up to the greater of $100,000 (indexed for inflation, now over $165,000) or 50% of the account balance at the time of the violation — per year. Willful cases can also be referred for criminal investigation.
• Form 8938 failures start at a $10,000 penalty, with up to $50,000 in additional penalties for continued failure after IRS notice, plus a 40% accuracy-related penalty on any understatement of tax attributable to undisclosed foreign assets.

"Willfulness" in this area includes reckless disregard and willful blindness, not just deliberate concealment — which is exactly why how you fix a late filing matters as much as fixing it. Our FBAR attorney guide covers the filing mechanics and defense options in detail.

One of the most common — and most expensive — surprises for U.S. persons with overseas investments is the Passive Foreign Investment Company (PFIC) regime. A PFIC is, broadly, a foreign corporation that earns mostly passive income or holds mostly passive assets. That definition captures nearly every foreign mutual fund, ETF, money market fund, and pooled investment product sold outside the United States, including funds held inside foreign brokerage accounts, UK ISAs, and Canadian TFSAs.

Under the default "excess distribution" rules of Internal Revenue Code Section 1291, gains and large distributions from a PFIC are thrown back over your entire holding period, taxed at the highest ordinary income rate in effect for each year — not the favorable long-term capital gains rate — and then hit with a compounding interest charge on the deferred tax. A modest foreign index fund held for a decade can produce an effective tax rate dramatically higher than the same investment in a U.S. fund.

Each PFIC generally requires its own annual Form 8621. Elections such as the Qualified Electing Fund (QEF) election or the mark-to-market election can tame the default regime, but they are time-sensitive, fund-specific, and depend on what information the foreign fund actually provides. Cleaning up years of unreported PFIC holdings is a disclosure-strategy question, not just a math problem. See our dedicated PFIC reporting guide for the election mechanics.

A U.S. person generally reports gifts or bequests totaling more than $100,000 during a tax year from a nonresident alien individual or foreign estate on Form 3520. Gifts from related donors must be aggregated where required. Purported gifts from foreign corporations or partnerships have a separate, annually adjusted threshold; check the IRS amount for the year received. Gifts and inheritances are generally excluded from income, but exceptions and separate reporting obligations can apply, including rules for covered expatriates and foreign trusts.

For unreported foreign gifts, IRC §6039F generally provides a penalty of 5% per month, up to 25% of the gift. Foreign trust reporting follows different rules under IRC §6677: initial penalties generally equal the greater of $10,000 or 35% of an unreported transfer or distribution; certain ownership-reporting failures use 5% of the relevant trust assets. Additional penalties and statutory limits may apply. The maximum penalty is not an inevitable outcome in every case.

We review the filing obligation, transaction type, notice, deadlines and supporting records before recommending a response. Reasonable-cause relief may be available, but ignorance of the requirement or reliance on a preparer does not automatically qualify. We assess the evidence and available administrative or court procedures; no reduction or particular result is guaranteed.

Form 3520 compliance · Penalty defense

Streamlined procedures are for eligible individual taxpayers, including estates of individuals, who certify that the relevant failures were non-willful. An IRS civil examination for any tax year, or an IRS criminal investigation, makes a taxpayer ineligible. The domestic track requires previously filed returns for the relevant three years and generally a 5% miscellaneous offshore penalty. Qualifying foreign-track submissions receive specified penalty relief. Tax and interest remain payable, and neither track guarantees immunity from audit or prosecution.

The foreign track has a specific nonresidency test, not simply a foreign mailing address. U.S. citizens and lawful permanent residents generally must have had no U.S. abode and spent at least 330 full days outside the United States in at least one of the relevant three years. Other individuals use the substantial-presence test. Both spouses must satisfy the applicable nonresidency requirement for a joint submission.

A streamlined submission generally covers the three most recent years whose return due dates, including applicable extensions, have passed, plus six years of required FBARs. The domestic track uses amended returns; qualifying foreign-track filers may submit original or amended returns. We prepare the applicable certification and supporting filings. The IRS does not acknowledge receipt under these procedures or issue a closing agreement; we retain delivery records and advise on future compliance.

The IRS Criminal Investigation Voluntary Disclosure Practice addresses willful tax noncompliance involving legal-source income. A truthful, complete and timely disclosure, cooperation and payment arrangements may reduce prosecution risk, but do not guarantee immunity. Timeliness can be lost before direct IRS contact: a civil examination, criminal investigation, relevant third-party information or information from a criminal enforcement action can disqualify a disclosure. Penalties depend on the applicable procedures and facts; proposed changes are not treated as effective rules.

The United States taxes its citizens and green card holders on worldwide income no matter where they live. An American in London, Toronto, Tel Aviv, or Sydney generally still must file a U.S. return, claim the foreign earned income exclusion or foreign tax credits, and file the same FBAR, FATCA, PFIC, and trust reports described above. Our Americans living abroad guide covers the core expat filing framework.

Two country-specific traps account for a large share of the cases we see:

• UK ISAs. An Individual Savings Account is tax-free in the United Kingdom, but the U.S. does not recognize the wrapper. Interest, dividends, and gains inside an ISA are taxable to a U.S. person, a stocks-and-shares ISA holding UK funds is typically a nest of PFICs, and the account itself is reportable on the FBAR and often Form 8938. See the UK ISA tax guide.
• Canadian TFSAs. The Tax-Free Savings Account gets no recognition under the U.S.–Canada treaty, so its income is currently taxable in the U.S., Canadian mutual funds and ETFs inside it raise PFIC issues, and the account is FBAR/FATCA-reportable. See the TFSA guide for U.S. citizens.

Expats who have not filed for years are frequently good candidates for the foreign track of the streamlined procedures — three years of returns, six years of FBARs, and no offshore penalty — but eligibility turns on residency facts and non-willfulness, both of which should be evaluated before filing anything.

• Foreign gifts and inheritances: A U.S. person may need Form 3520 even when the transfer is not taxable income.
• Foreign trusts: Forms 3520 and 3520-A can apply to ownership, distributions, loans, gifts, and trust-related transactions.
• Foreign accounts: FBAR and FATCA rules can apply even when the account produced little income or belongs to a taxpayer living outside the United States.
• PFIC investments: Foreign mutual funds and pooled funds can require Form 8621 and may be taxed under punitive default rules unless an election is available.
• UK ISAs and Canadian TFSAs: Accounts that are tax-favored abroad may still create U.S. income tax and reporting obligations.
• Late or incomplete filings: IRS penalty notices should be reviewed before a taxpayer responds, amends returns, or sends a reasonable-cause statement.