You may have heard the term FATCA, and know that it relates somehow to increasing IRS and Treasury Department tax compliance efforts against tax evasion by US taxpayers holding financial accounts and other financial assets abroad.
You may be wondering whether (and how) FATCA might affect you personally as an expat taxpayer, even though you have been compliant with your tax return filings.
What Does FATCA Refer To?
FATCA stands for the Foreign Account Tax Compliance Act, which was enacted by the US Congress in 2010 to combat tax evasion abroad, and came into force in July 1st, 2014.
Under FATCA, certain US taxpayers holding financial assets outside the United States above a certain threshold amount, must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets. There are serious penalties for failing to report these financial assets (see below).
FATCA also requires certain foreign financial institutions, including foreign banks, to report directly to the IRS information about financial accounts held by directly by US taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest. In addition to banks, other foreign institutions such as investment entities, brokers, pension firms and insurance companies are required to report information about US account holders and owners.
How Can FATCA Affect Expats?
FATCA can affect expats in 2 ways:.
- Expats with foreign financial accounts and assets above a threshold amount (see below) must report them on Form 8938 when they file their federal tax returns
- Foreign banks, investment firms and other foreign financial institutions are required report their US expat account holders, thus allowing the IRS to monitor their foreign financial accounts
As An Expat, When Do I Need To Declare My Foreign Financial Accounts and Assets on My Tax Return?
US taxpayers with foreign registered financial accounts and assets are required to report them on Form 8938 (filed together with the taxpayer’s US return) if the taxpayer is living abroad and has a total of over $200,000 at the end of the year, or $300,000 at any time during the year. If the taxpayer is married and filing jointly with a spouse, the reporting thresholds are higher: over $400,000 at year-end for a married couple living abroad, or over $600,000 at any time during the year.
Are There Other Reporting Requirements for Foreign Financial Accounts Besides FATCA Reporting on Form 8938?
Yes – US expats with foreign financial accounts that have a cumulative balance of $10,000 at any time during the year also must report them on FinCEN Form 114, which is better known as an FBAR.
How Severe Are FATCA Penalties, For Failing To Report Foreign Financial Accounts and Assets?
Very severe – the penalty under FATCA for failure to report required foreign financial assets on Form 8938 is $10,000 per year, up to a maximum of $50,000.
Expats should be aware that the IRS and Treasury Department have a steadily growing ability to identify and severely penalize non-filers – since 2015 (the first full tax year in which FATCA was in effect), the IRS and Treasury Department have in their possession foreign financial data on US taxpayers reported by foreign banks and other financial firms, which allows them to compare the foreign account information reported on taxpayers’ FATCA Form 8938 on their tax returns and FBAR reports to the account information reported by the foreign institutions, and to flag any major discrepancies or unreported account information.
FATCA Reporting Requirements for Foreign Financial Firms
A very large (and growing) number of foreign financial institutions now cooperate with the IRS and Treasury Department by reporting US taxpayer foreign financial information to them, in compliance with FATCA – almost half a million firms worldwide. Foreign firms failing to comply with the FATCA reporting requirements by not disclosing their US account holder information results in the a 30 percent withholding tax imposed on the firms, on any US-source income they have from engaging in trade or business in the US.
An unfortunate (but unintentional) side effect of these strict FATCA requirements on foreign financial firms is that some foreign firms now refuse to serve American clients, or even drop existing ones, rather than comply with the FATCA reporting requirements. This is causing additional hardship for US expats seeking to open new bank or other financial accounts abroad, or to obtain a home mortgage or business loan.
The IRS maintains a searchable public database of all foreign financial institutions (FFI) which are in compliance with FATCA guidelines, which is updated monthly. If you are an expat considering opening an account with a foreign financial institution and want to know whether it is FATCA compliant, you can search the IRS FATCA FFI List here.
Unsure whether the FATCA reporting rules apply to you, and you have a requirement to file Form 8938 with your US tax return? Contact Universal Tax Professionals today and we will ensure that you are compliant.