FATCA: The Foreign Account Tax Compliance Act
If you’re a U.S. citizen living abroad or in the U.S and you hold substantial financial assets in overseas accounts or foreign entities, its important to stay up to date with the reporting requirements placed on you by the IRS and the U.S. treasury. FATCA -or the Foreign Account Tax Compliance Act- came into effect in 2014 and was introduced to combat potential tax evasion by U.S. citizens at home and overseas. In the following article, Moneywood has provided some basic information concerning FATCA, such as who needs to file, how and when to file and the consequences for failing to file if required to do so.
FATCA Facts
The Foreign Account Tax Compliance Act requires certain U.S. taxpayers who hold financial assets outside the U.S., to report those assets using IRS Form 8938 (Statement Of Foreign Financial Assets), together with your annual tax return. FATCA also requires certain foreign financial institutions to report directly to the IRS. For example: accounts held by U.S. taxpayers, or accounts held by foreign entities in which U.S taxpayers have a substantial ownership interest, may need to be reported directly to the IRS by certain foreign financial institutions. Form 8938 can be downloaded here. Up to date in-depth information about FATCA can be found here.
Who must file Form 8938 under FATCA?
All U.S. taxpayers who hold substantial foreign assets or accounts must file Form 8938 with there annual tax return if those assets exceed the prescribed thresholds. The current thresholds for U.S. citizens living abroad are considerably higher than those for U.S. residents.
Reporting thresholds will vary depending on your situation. If you are an expat filing jointly with your spouse and your specified foreign financial assets exceed $ 400,000 on the last day of the financial year or have exceeded $ 600,000 at any time in the previous financial year, you must file Form 8938 with your annual tax return.
For unmarried persons if your specified foreign financial assets exceed $ 200,000 on the last day of the financial year or have exceeded $ 300,000 at any time during the previous financial year, you must file Form 8938 with your annual tax return.
What are specified foreign assets?
Specified foreign assets according to the IRS definition include, foreign financial accounts and foreign non account assets, such as foreign financial instruments, foreign stocks and securities, contracts with non U.S. persons and interests in foreign entities.
Exceptions
Listed below are some of the assets that are exempt from the reporting requirements under FATCA and are not considered specified foreign assets.
- Financial accounts maintained by U.S. payers, such as a U.S. branch of a foreign financial institution, foreign subsidiaries of U.S. corporations and foreign branches of us financial institutions.
- Interests in social insurance, social security or other similar programs with foreign governments.
- Foreign corporations reported on Form 5471.
- Foreign partnerships reported on Form 8865.
A full list of reportable assets and exemptions is beyond the scope of this article. If you would like more information about this you can click here for a complete overview provided by the IRS.
Deadlines
The deadline for filing Form 8938 under FATCA is the same as your standard U.S. expat tax return. For U.S. residents tax returns must be filed by April 15th, however for U.S. expats the deadline is June 17th . An extension to this deadline until October 15th is available on request.
Penalties
If you are required to file Form 8938 and you fail do so, you could potentially incur severe penalties. Failure to file could lead to a $ 10,000 fine, and up to $ 50,000 fine if you fail to file after being notified by the IRS. There will also be a 40% penalty added to this for understatements of tax attributable to non-disclosed assets. Understanding which types of assets and the correct valuation of assets can be extremely complicated under FATCA, therefore we always highly recommend seeking advice from a tax professional.
Further reading
Moneywood has also published information about filing the U.S. annual tax return Form 1040 here, or alternatively you can read here about the filing requirements for Form 5471 (Information Request Of U.S. Persons With Respect To Certain Foreign Corporations). If you have questions or need advice when submitting Form 8938. Our experts at Moneywood have many years of experience supporting our valued U.S. expat community when tax season comes around. Please don’t hesitate to contact us. We are here to help.
