FOREIGN ASSETS, FEDERAL TRAPS

The divorce is in Florida. The account is in São Paulo. The penalties for handling that wrong start in five figures per year — and the divorce itself is about to put the account under oath.

TWO REGIMES, TWO FORMS, TWO THRESHOLDS

The FBAR (FinCEN Form 114) is a Treasury filing, due when foreign financial accounts aggregate over $10,000 at any moment in the year — signature authority counts, and so does the account your parents added you to a decade ago. Form 8938 rides with the income tax return under a separate statute, with higher thresholds and a broader reach into foreign financial assets, not just accounts. They overlap without excusing each other: one asset can require both filings, and missing each carries its own penalty.

HOW THE PENALTIES ACTUALLY RUN

For non-willful FBAR violations, the Supreme Court settled in Bittner that the penalty applies per unfiled report — per year — not per account, which tamed the most nightmarish math but still leaves five figures a year, adjusted for inflation, for paperwork nobody knew existed. For willful violations the penalty is measured per account, per year, at the greater of a six-figure floor or half the account balance — and “willful” in this corner of the law includes reckless disregard, which the government has proven from little more than a checked “no” box on Schedule B. Form 8938 stacks its own penalties on top, and unreported foreign income keeps the assessment statute open longer than the three years everyone assumes.

WHY THE DIVORCE CHANGES THE CLOCK

Financial affidavits, mandatory disclosure, and forensic tracing put every account on the table — under oath, in a proceeding your spouse’s counsel controls. The streamlined disclosure procedures that cure non-willful noncompliance at modest cost require a certification of non-willfulness and, practically, that the government hasn’t already found the accounts another way. An angry spouse with a completed discovery file is another way. The window for the cheap fix is measured by your own case schedule.

If there are unreported foreign assets anywhere in the marriage, the conversation belongs under privilege, before the affidavit is signed — the options only narrow from there.

THE DIVISION HAS ITS OWN TRAPS

• §1041(d): the tax-free transfer rule does not apply when the recipient spouse is a nonresident alien — a transfer that would be invisible domestically can recognize gain outright in a cross-border marriage.
• Foreign pensions: treaty treatment, employer-trust reporting, and sometimes the foreign-trust forms with their own severe penalty regime — a “retirement account” label from another country settles nothing.
• Foreign entities: an interest in a foreign corporation or partnership moving between spouses can trigger information filings neither return has ever included.
• The house abroad: foreign real estate held directly isn’t an 8938 asset — but the entity or account that holds it usually is, and the rental income was always reportable.

THE ORDER OF OPERATIONS

Inventory first — every account, entity, pension and property, both spouses, under privilege. Cure second — through the disclosure path the facts support, before discovery does it involuntarily. Divide third — with the transfer reporting drafted into the agreement. Handled in that order, this is compliance work with a known price. Handled backwards, it is penalty defense with your own affidavit as Exhibit A.

ELSEWHERE IN THIS SECTION

• International Assets — the practice page: cross-border property and reporting in the division
• Foreign Accounts & Voluntary Disclosure — the controversy practice: curing the past before it surfaces
• Are Divorce Legal Fees Deductible? — the fee-basis article — some now, some later, some genuinely lost