There has been a lot of discussion about the possible U.S. tax obligations for Pope Leo XIV, the first U.S. citizen Pope. Some of the assertions have generated confusion, leaving key U.S. tax concepts insufficiently addressed.
One of the biggest areas of misunderstanding has been the Pope’s possible FBAR reporting (FinCEN Form 114) versus FATCA reporting (IRS Form 8938) obligations for financial accounts at the Vatican Bank. Some of the discourse has been conflating the FBAR requirements under the Bank Secrecy Act with those of FATCA Form 8938 requirements under the U.S. tax laws.
It is important to distinguish between the two. This article explains why, notwithstanding his vow of poverty with the Order of St. Augustine, Pope Leo XIV might face a legal duty under the FBAR rules to disclose financial accounts at the Vatican Bank, but need not report them under the mandates of FATCA on Form 8938. The holdings of the Vatican Bank are significant, totalling €5.4 billion in assets and serving 12,361 clients according to its 2023 Annual Report.
The Legal Basis For FBAR Filing
The FBAR (FinCEN Form 114) is mandated under Title 31 of the U.S. Code, the Bank Secrecy Act. The BSA was enacted in the 1970s to fight terrorism, tax evasion and other financial crimes. It is not part of the Internal Revenue Code and does not impose any tax. Instead, it is an informational form requiring U.S. persons to report any “financial interest in or signature authority over” foreign financial accounts if the aggregate value of all such accounts exceeds $10,000 at any point in the calendar year.
The FBAR rules provide that having control over disposition of assets in a foreign financial account by direct communication with the financial institution is signature authority, sufficient to trigger FBAR filing obligations if the threshold is met. It is immaterial that one lacks ownership of the account.
Additionally, the FBAR reporting obligation applies regardless whether the person is required to file a U.S. income tax return. All of this makes sense since the aim of FBAR is transparency about foreign financial accounts and not taxation.
Distinction Between FBAR And FATCA
FATCA, enacted in 2010, is part of the U.S. tax laws, under Title 26 of the U.S. Code (Title 26 embodies the U.S. Internal Revenue Code). FATCA information reporting is carried out by completing IRS Form 8938 to report an individual’s ownership of so-called “specified foreign financial assets” that meet a certain threshold. It is a different regime altogether from the BSA and its concomitant FBAR filing obligations.
FATCA, like FBAR, is aimed at offshore asset transparency, but has crucial differences. First, foreign financial assets that must be reported on the Form 8938 are only those assets in which the person has a beneficial ownership interest. While signature authority alone doesn’t trigger Form 8938 reporting, it serves as an absolute and independent linchpin for FBAR disclosure.
Second, Form 8938 is mandated only if the U.S. person is required to file a U.S. tax return and the specified foreign financial assets exceed certain thresholds. FBAR, by contrast, is not tied to a tax return. It must be filed even if the individual has no tax return filing obligation and even if he earns no income.
These distinctions are vital in the case of Pope Leo XIV.
FBAR And FATCA: Pope Leo’s Vow Of Poverty And Lack Of Ownership
When he was in his 20’s, Pope Leo XIV took a vow of poverty as part of the Order of St. Augustine. The vow he took is very strict and means that he does not own personal property or assets; all are turned over to the Order. Additionally, any income he may earn or gifts he may receive are also turned over to the Order, a tax-exempt entity.
This vow of poverty may exempt him from the need to file a U.S. tax return altogether even though as a general matter, U.S. persons living and working in foreign countries must file a tax return. Filing in the typical case is required, even if the foreign earned income falls below the special exemption amount for Americans overseas. Furthermore, the vow would mean that Pope Leo has no foreign financial assets in which he holds a beneficial interest. Accordingly, for these reasons, the Pope would have no duty to file FATCA Form 8938.
The Pope’s possible duties under FBAR are completely different. The requirement to file FBAR arises independently from ownership of any assets or earned income. It arises from control—specifically, signature or other authority over foreign financial accounts.
The Vatican Bank And FBAR Signature Authority
The pressing issue is not whether Pope Leo XIV personally owns accounts at the Vatican Bank, formally known as the Institute for Works of Religion, but whether he has “signature or other authority” over the IOR accounts within the meaning of the FBAR regime. Under FBAR regulations, signature authority exists when an individual can control the disposition of assets in a financial account by direct communication (whether in writing or otherwise) with the institution maintaining the account.
The Holy See is the Catholic Church’s governing authority, led by Pope Leo, and is recognized as a sovereign entity. In 2022, Pope Francis mandated that all Holy See assets be consolidated in the Vatican Bank. This is a policy inherited by Pope Leo and it is this centralized control which raises questions whether the Pope’s role equates to a de facto signature authority over IOR accounts. As the sovereign head of the Vatican and supreme authority over Vatican entities, including its financial institutions, Pope Leo XIV arguably exercises such control.
The Importance Of Proper Legal Analysis
Some recent discussions that have speculated on the Pope’s potential U.S. tax obligations, seem to have a misunderstanding or misapplication of the relevant legal frameworks. Confusing FBAR and FATCA is a common, but very significant error. It is an error that can result in very harsh penalties as well as the stress of audits and an open-ended statute of limitations if the Form 8938 remains unfiled when otherwise required.
Pope Leo, FBAR, FATCA: Final Thoughts
Pope Leo XIV’s vow of poverty likely shields him from income tax filing and FATCA’s Form 8938 requirements. However, his potential control over the Vatican Bank raises important questions about FBAR filing duties. Since the Pope is a U.S. citizen and potentially exercises signature authority over foreign financial accounts that undoubtedly exceed $10,000 in aggregate, he may well have an FBAR obligation, regardless of his personal lack of wealth.
In this era of financial transparency, even a pontiff may not be exempt from the long arm of U.S. financial reporting laws. The intriguing case of Pope Leo and his possible U.S. reporting obligations underscore the vast reach of FBAR and FATCA. While not everyone can be the Pope, this situation is a startling reminder that all U.S. citizens and residents must abide by FBAR mandates. It also serves as a warning to foreign employers who do not want company accounts to be disclosed to the IRS, that they should re-think giving U.S. persons control over such accounts.
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NO ATTORNEY-CLIENT RELATIONSHIP OR LEGAL ADVICE
This communication is for general informational purposes only. It is not intended to constitute tax advice or a recommended course of action. Professional tax advice should be sought as the information here is not intended to be, and should not be, relied upon by the reader in making a decision.
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