As a U.S. citizen living and working overseas, it is likely that throughout your time in your country of residence you have opened a foreign bank account, invested in foreign stocks, or acquired other forms of foreign assets while living outside the United States. Each year, the IRS requires that these foreign assets are reported to the Internal Revenue Service. The Foreign Account Tax Compliance Act was put in place to ensure that the IRS can verify if citizens are complying with necessary FATCA reporting. FATCA is one tax code that expats must be aware of each year, and the team at Evolution Tax and Legal is here to break down FATCA: how it works, who must comply, reporting requirements, and penalties that can be incurred for non-compliance.
What Is the Foreign Account Tax Compliance Act (FATCA)?
The IRS faced many difficulties in the past with U.S. citizens and green card holders hiding money in foreign bank accounts and other assets overseas, which resulted in individuals paying less money in taxes than they were required to. In an effort to reduce the amount of foreign assets that were being hidden from the IRS by U.S. citizens, the U.S. government passed FATCA. FATCA requires foreign financial institutions to share financial information of U.S. taxpayers, so the IRS can verify if taxpayers are complying with tax returns each year.
During tax season, U.S. citizens whose foreign financial assets exceed a certain amount must file Form 8938 with their tax return, and with FATCA, the IRS is able to verify that Form 8938 has been filed accurately by any expats.
FATCA Reporting Requirements
Both individuals and financial institutions are involved in FATCA. Individuals will be required to file FATCA Form 8938 each year with their individual tax return, but the reporting requirements are not as straightforward as they seem. The complicated nature of determining what is a specified foreign asset can leave many individuals scratching their head around tax season, so speaking with an experienced expat tax lawyer is recommended for your filing of Form 8938.
Foreign financial institutions are required to disclose the identity of U.S. citizens and the value of the assets they hold with the institution to the IRS each year. The reporting requirements for the financial institutions depend on which country they operate out of, since each country has a different agreement with the U.S. and will go about the reporting process differently. There are over 110 countries that have treaties with the U.S. that requires their financial institutions to comply with FATCA reporting.
What Should Be Reported Under FATCA?
Any foreign assets and specified foreign assets that are held by U.S. citizens and green card holders living abroad are required to be reported under FATCA. This includes, but is not limited to:
- Foreign bank accounts
- Foreign stock holdings
- Foreign pensions
- Foreign mutual funds
- Foreign hedge funds
- Foreign issued life insurance
Homes that are owned in a foreign country are not required to be reported as a foreign asset under FATCA, but foreign real estate that is owned through a foreign entity may need to be reported as a specified foreign asset which will include the value of the real estate. Determining which foreign financial assets are required to be reported under FATCA can be complicated and speaking to a professional is recommended to ensure proper filing.
FATCA Reporting Thresholds
As with many reporting thresholds, the numbers vary depending on whether you are filing an individual tax return or a joint tax return.
For taxpayers living abroad, the IRS requires FATCA Form 8938 to be filed if:
- You are married, filing a joint-tax return, and your foreign assets exceeded the value of $600,000 throughout any point in the year, or exceeded $400,000 on the last day of the tax period in which you are filing.
- You are single, filing an individual tax return, and the value of your foreign financial assets exceeded $300,000 at any point throughout the year, or exceeded $200,000 on the last day of the tax period in which you are filing.
The IRS considers anyone whose tax home is in a foreign country or who has resided in a foreign country for more than 330 days out of the last 12 months as a citizen living abroad.
For taxpayers living in the U.S. with foreign financial assets, the IRS requires FATCA Form 8938 to be filed if:
- You are single, filing an individual tax return and the value of your foreign financial assets exceeds $75,000 at any point throughout the year, or exceeds $50,000 on the last day of the tax period in which you are filing.
- You are married, filing a joint tax return, and the value of your foreign financial assets exceeds $150,000 at any point throughout the year, or exceeds $100,000 on the last day of the tax period in which you are filing.
- You are married, filing separate tax returns, and the value of your foreign financial assets exceeds $75,000 at any point throughout the year, or exceeds $50,000 on the last day of the tax period in which you are filing.
FATCA Penalties for Non-Compliance
If an individual fails to file FATCA Form 8938, they are subject to penalties from the IRS. There is a failure to file penalty of $10,000, and the individual will face up to a $50,000 fine if they continue to fail to file Form 8938 after notification from the IRS. There is a 40% fine for those who understate tax attributable foreign assets in their filing of Form 8938. Individuals and financial institutions alike will face penalties for non-compliance with FATCA, so filing these forms properly and in a timely manner is highly encouraged.
FATCA vs. FBAR
While FATCA and FBAR are similar tax forms, they differ in their reporting requirements and are not to be filed with the same governmental agency. FATCA is required to be filed by U.S. taxpayers and green card holders who hold specified financial assets in foreign countries, while FBAR is filed by a wider range of entities, including trusts and estates who hold foreign financial assets.
There are certain assets which are required to be filed on one form and not the other, and certain assets that will be reported on both forms. FATCA requires foreign stocks, securities and hedge funds be reported, while FBAR requires bank accounts held in foreign branches of U.S. banks and indirect ownerships of financial interests the individual may have.
The FBAR is required to be filed with the Financial Crimes Enforcement Network (FinCEN) which is a department of the U.S. treasury, while FATCA is required to be filed with the IRS, which is the typical governmental agency that deals with tax filings each year. It is possible that you may have to file both of these forms during tax season, which can be a complicated process for an individual to accomplish each year.
File FATCA Documents and Your Expat Tax Return With Evolution Tax and Legal
Filing FATCA documents can become complicated once you begin to determine which specified foreign financial assets are required to be reported to the IRS. This complicated process can be difficult for an individual to complete each year, but with a team of seasoned professionals your expat tax season can be a breeze. The team at Evolution Tax and Legal is certified in both law and accounting, making us experts in international tax. Our team of professionals can help you properly file your FATCA documents with minimal strain and ensure no penalties are incurred. Contact the team at Evolution Tax and Legal for help with your FATCA documents today.
Is FATCA Only for U.S. Citizens?
All U.S. citizens and green card holders are affected by FATCA. This includes businesses and institutions that are owned by U.S. citizens, individuals that spend a certain number of days within the U.S. each year and U.S. partnerships and corporations. All banks worldwide are also affected by FATCA.
Who Is a U.S. Person Under FATCA?
- A citizen or resident of the United States.
- Any U.S. citizen owned partnership.
- A U.S. citizen owned corporation.
- Any estate other than a foreign estate.
- Any trust where one or more U.S. persons has the ability to control substantial decisions of the trust.
- An individual who has spent a certain amount of days throughout the year within the United States.
- Students on visas who have been living within the U.S. for up to five years.
- Teachers and researchers on visas who have been living within the U.S. for up to two years.