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Hawaii sits at the center of Pacific finance. Hospitality, construction, real estate, defense contracting, shipping, and professional services routinely move money, people, and data across borders. That reality creates Federal international tax touchpoints for Hawaii residents and businesses: foreign bank and brokerage accounts, non-U.S. pensions and funds, interests in offshore companies and trusts, cross-border services, mobile executives, and inbound U.S. investments. At the Tax Law Offices of David W. Klasing, our dual-licensed International Tax Attorneys and CPAs help you meet federal tax filing, reporting, and payment duties, and resolve federal controversies when those duties are missed or challenged.

FATCA is not a single form. It is a set of federal tax laws that require U.S. taxpayers to disclose specified foreign financial assets on Form 8938. In a parallel regime, foreign financial institutions are required to report U.S. account information to the IRS, often through intergovernmental agreements and the IRS’s IDES gateway. FATCA works alongside the Bank Secrecy Act’s FBAR rules. These overlapping systems give the government multiple data feeds to flag mismatches and expand an examination. The IRS’s official FATCA pages and Form 8938 instructions set the framework for who must file, what is reportable, and how penalties work.

What FATCA Requires From U.S. Taxpayers – Form 8938, Thresholds, and Penalties

Certain U.S. persons must file Form 8938, Statement of Specified Foreign Financial Assets, with their federal income tax return when the total value of specified foreign financial assets exceeds defined thresholds. For most taxpayers residing in the United States, the basic thresholds are $50,000 on the last day of the year or $75,000 at any time during the year for single filers, and $100,000 or $150,000 for married filing jointly. Higher thresholds apply to qualifying taxpayers living abroad. Failure to file can trigger a $10,000 penalty, which increases by $10,000 for each 30 days after IRS notice, up to $50,000. There is also a related accuracy-penalty regime for understatements attributable to undisclosed foreign assets.

Congress added even sharper tools. If you fail to file Form 8938 or omit more than $5,000 of income attributable to a reportable foreign asset, the federal assessment period can extend to six years. In addition, a 40 percent accuracy-related penalty can apply to understatements attributable to undisclosed foreign financial assets. These mechanics are described in the Code and the Internal Revenue Manual sections that Appeals and Examination use in practice.

Specified foreign financial assets include more than bank accounts. They reach many non-account assets, such as certain interests in foreign entities and financial instruments held outside the United States. Form 8938 is attached to the tax return. It does not replace the FBAR, which is a separate Bank Secrecy Act filing administered by FinCEN.

FBAR vs. FATCA – Two Different Regimes that Often Both Apply in Hawaii

The FBAR is a Bank Secrecy Act report filed electronically with FinCEN when the aggregate value of foreign financial accounts exceeds 10,000 dollars at any time during the calendar year. The due date is April 15 with an automatic extension to October 15. In Bittner v. United States (2023), the U.S. Supreme Court held that non-willful FBAR penalties apply per form, not per account. Willful FBAR penalties remain severe. FBAR rules and FATCA frequently overlap, and many taxpayers must satisfy both.

FATCA for Entities and Payors – Chapter 4 Withholding, IGAs, and Form 8966

FATCA also created Chapter 4, which involves withholding and reporting. A U.S. withholding agent must withhold 30 percent on certain U.S.-source payments to a foreign financial institution unless the FFI is treated as participating, deemed-compliant, or exempt. Withholding can also apply to certain payments to foreign entities that fail to identify substantial U.S. owners. Reporting in this regime uses Forms 1042 and 1042-S. Foreign financial institutions report U.S. accounts on Form 8966 either directly to the IRS or through their government under Model 1 or Model 2 intergovernmental agreements using the IRS IDES system. These rules matter to Hawaii clients who own or control non-U.S. entities, interact with foreign banks, or receive payments routed through foreign intermediaries.

Where Taxpayers in Hawaii Most Often Run into Trouble

Foreign Pensions and Funds, Including PFICs

Many non-U.S. pooled vehicles and retail funds are PFICs, which can require Form 8621 filings and special tax computations unless a timely QEF or mark-to-market election is made. The instructions explain when, how, and what to report.

Interests in Foreign Corporations, Partnerships, and Disregarded Entities

U.S. officers, directors, and certain shareholders may need Form 5471; partners in foreign partnerships may need Form 8865; foreign branches and disregarded entities may require Form 8858. Each form has its own category tests, schedules, and penalty rules.

Foreign Trusts and Gifts

U.S. owners and beneficiaries often must file Forms 3520 and 3520-A. Transfers to foreign corporations can trigger Form 926. Penalties for late or incomplete filings are significant, which is why planning and timely filing are critical.

Inbound Payments and Withholding

U.S. payors must document foreign payees and may owe Chapter 3 or Chapter 4 withholding and reporting on Forms 1042 and 1042-S. IRS guidance coordinates these regimes with FATCA due diligence and information reporting.

Parallel Systems and Penalty Exposure

FATCA’s Form 8938 rides with the income-tax return and has its own penalty and statute rules, while FBAR is filed with FinCEN and follows BSA penalties. The IRS maintains an international penalty page summarizing potential sanctions by form.

Current Federal Enforcement Posture You Should Expect

The IRS continues to prioritize offshore compliance through overlapping reporting streams and analytics. The IRS FATCA programs, FBAR enforcement, and information returns work in tandem to surface underreporting. When a case escalates, the IRS Criminal Investigation Division brings thousands of new cases annually and historically reports conviction rates near 90 percent for cases it accepts, which underscores why a disciplined early strategy is essential when criminal exposure is possible.

Digital Assets

The IRS continues to treat virtual currency as property. Notice 2014-21 sets the baseline, Rev. Rul. 2019-24 addresses hard forks and airdrops, and Rev. Rul. 2023-14 explains when staking rewards are taxable. The Service reminds filers that they must answer the digital-assets question and report any related income. Broker reporting rules under section 6045 were finalized for custodial digital-asset brokers. Reporting on Form 1099-DA will begin for transactions occurring on or after January 1, 2025, with the first reports in 2026, followed by a phased basis and backup-withholding rules. Separately, the Treasury announced transitional guidance under section 6050I: businesses do not yet include digital assets when determining whether a Form 8300 filing is required for cash receipts over $10,000 until regulations are issued.

Statutes of Limitations and Why Timing Matters

FATCA adds “teeth” to assessment rules. If Form 8938 is not filed, or if more than $5,000 of income attributable to an asset that should have been reported on Form 8938 is omitted, the IRS can assess tax for six years. On top of the initial $10,000 failure-to-file penalty for Form 8938 (which can rise to $50,000 after notice), a 40 percent accuracy-related penalty can apply to understatements tied to undisclosed foreign assets. These are in addition to general negligence and civil fraud penalties where facts warrant.

Choosing the Right Remediation Track

The right path depends on willfulness, timing, and what the government already knows. Attempting these programs without counsel can create new risks. Communications with accountants are not privileged; only an attorney-client relationship and the attorney work-product doctrine protect admissions and analysis. That protection can be extended to accountants engaged by a law firm under a Kovel arrangement.

Streamlined Filing Compliance Procedures

For non-willful failures, Streamlined submissions generally require three years of amended or delinquent returns and six years of FBARs, plus a detailed non-willfulness certification. The IRS maintains separate guidance for U.S. residents and for those living abroad.

DIIRSP – Delinquent International Information Return Submission Procedures

DIIRSP instructs taxpayers to file delinquent international information returns through regular channels with reasonable-cause statements. There is no automatic penalty waiver, making careful facts and law essential.

Delinquent FBARs

The IRS and FinCEN explain how to file late FBARs and align those filings with broader compliance fixes.

IRS Criminal Investigation Voluntary Disclosure Practice

Where conduct was willful, the CI-administered VDP remains the primary pathway to resolve criminal exposure while restoring compliance. It begins with Form 14457 and requires truthful, timely, and complete disclosure, cooperation, and arrangements to pay tax, penalties, and interest.

Contact the Tax Law Offices of David W. Klasing to Build a Defensible FATCA Strategy for Hawaii Clients

At the Tax Law Offices of David W. Klasing, our dual-licensed Tax Attorneys and CPAs can step in the moment there is any sign your foreign asset issue could escalate. If you received an IRS or FinCEN notice about FBARs, a Form 8938 mismatch, a letter referencing Forms 5471, 8865, 8858, 3520, 3520-A, 8621, or 926, a 1042 or 1042-S withholding inquiry, or IRS Criminal Investigation contacted you, call us before you respond. We will halt direct questioning, preserve confidentiality through attorney-client and work-product protections, and deploy Kovel accountants so fact gathering does not turn your preparer into a witness. Early, disciplined damage control is the best way to keep matters civil and to avoid a life-altering criminal tax referral. We will:

Control the First Contact

If you receive an IRS or FinCEN letter about foreign accounts or a Form 8938 mismatch, or if an examiner or special agent reaches out, do not respond on your own. We verify the posture of the case, route all communications through counsel, protect privilege and work product, and sequence any document productions to avoid volunteering harmful material. When appropriate, we posture the matter for the IRS’s Independent Office of Appeals, which evaluates cases based on “hazards of litigation.”

Fix the Record Intelligently

We reconstruct foreign account histories, PFIC basis, CFC earnings and profits, GILTI computations, and trust accounting, then choose the correct remediation path. Our filings are aligned with published IRS guidance: Notice 2014-21 (virtual currency property treatment), Rev. Rul. 2019-24 (hard forks and airdrops), Rev. Rul. 2023-14 (staking reward timing), FBAR rules administered by FinCEN, and current instructions for Forms 8938, 5471, 8865, 8858, 8621, 3520, and 3520-A.

Keep it Civil

We frame facts to avoid badges of fraud, brief the law the way Appeals decides cases using a hazards-of-litigation analysis, and, where warranted, engage Appeals before litigation. If litigation becomes necessary, we are trial-ready in the U.S. Tax Court or federal refund forums.

Coordinate Chapter 4 Issues

Clients with non-U.S. entities or banking relationships may face FATCA documentation and withholding downstream, including W-8 series documentation, GIIN registration, and 1042/1042-S reporting for U.S. payors. We align those obligations with foreign counterparties and FATCA IGA frameworks to prevent unnecessary 30 percent withholding.

Our Hawaii dual-licensed International Tax Attorneys and CPAs handle the entire remediation spectrum for offshore and cross-border exposures. That includes reconstructing foreign account histories and PFIC basis, computing CFC Subpart F and GILTI, correcting trust and gift reporting, and building a targeted evidentiary record that supports penalty abatement and sustainable return positions. Where failures were non-willful, we prepare Streamlined submissions with detailed certifications and six years of FBARs. Where conduct was willful, we evaluate timing and eligibility for the IRS Criminal Investigation Voluntary Disclosure Practice and manage every step of the process, from the initial preclearance through final closing agreements. When proposed penalties or adjustments are not legally supportable, we posture the case for the Independent Office of Appeals and, if necessary, are ready for litigation in the appropriate federal forum.

David’s proven proficiency is now available in Honolulu, Hawaii, at our appointment-only satellite office, providing both legal and federal tax services in one place—at a single hourly billing rate. We have introduced a flexible scheduling option, allowing our clients to reserve a four-hour slot at any of our satellite locations. David W. Klasing will travel to any of our satellite offices to meet with you personally. This option must be preceded by a one-hour phone or GoToMeeting consultation to warrant incurring the travel expenses and opportunity costs of traveling. We have designed this service to benefit our clients, with no additional travel expenses added to your bill. Call us at 1-(808)-518-2380 or complete our online contact form today.

Our Honolulu, Hawaii Office is Conveniently Located at:

1003 Bishop Street, Suite 2700
Honolulu, HI 96813
Telephone: 1-(808)-518-2380