FBAR and FATCA for Cook Islands trust accounts

What FBAR requires

The Report of Foreign Bank and Financial Accounts, FinCEN Form 114, must be filed by a US person who has a financial interest in or signature authority over one or more foreign financial accounts with an aggregate value exceeding $10,000 at any point during the calendar year. A Cook Islands trust account held by a US grantor trust owner qualifies. The FBAR is filed electronically with the Financial Crimes Enforcement Network, not with the IRS. It is due by April 15, with an automatic extension to October 15.

The financial interest standard is broader than direct ownership. A US person has a financial interest in a foreign account if they are the owner of record or have legal title, or if another person holds the account for the benefit of the US person. A grantor trust settlor who is treated as the owner of the trust has a financial interest in the trust's foreign accounts for FBAR purposes.

What FATCA requires

The Foreign Account Tax Compliance Act requires US persons to report specified foreign financial assets on Form 8938, Statement of Specified Foreign Financial Assets, filed with the personal income tax return. The reporting thresholds are higher than for FBAR: $50,000 for a single filer at year end or $75,000 at any point during the year, with higher thresholds for married filers and US persons living abroad.

A Cook Islands trust is a specified foreign financial asset for FATCA purposes if the settlor is treated as the owner of the trust under the grantor trust rules. The value reported is the trust's asset value. Where both FBAR and Form 8938 reporting is required for the same account, both must be filed. Filing one does not satisfy the obligation to file the other.

How they interact

FBAR and FATCA are parallel regimes with different administering agencies, different forms, different thresholds, and different penalty structures. FBAR applies at a lower threshold ($10,000) and is filed with FinCEN. FATCA applies at a higher threshold ($50,000 and above) and is filed with the IRS. Both apply to the same underlying Cook Islands trust accounts. A CPA preparing foreign trust filings handles both alongside Forms 3520 and 3520-A as part of a complete annual compliance package.

The penalty regimes

FBAR penalties for non-wilful violations are up to $10,000 per violation. Wilful violations carry the greater of $100,000 or 50 percent of the account balance per violation, and can result in criminal prosecution. Courts have held that each year of non-filing is a separate violation, so a multi-year failure to file FBAR on a substantial account can produce total penalties that far exceed the account value.

FATCA Form 8938 penalties start at $10,000 for failure to disclose and increase by $10,000 for each 30-day period of continued non-disclosure after IRS notification, up to $50,000. An additional penalty of 40 percent of the underpayment attributable to undisclosed foreign financial assets applies where tax is underpaid as a result of the non-disclosure.

General information only. FBAR and FATCA rules are complex and penalties are severe. Confirm your specific obligations with a CPA and if wilful non-compliance is a concern, with a tax attorney as well.