Do you need to file FATCA? Guide to reporting foreign financial assets and exemptions
The Foreign Account Tax Compliance Act (FATCA) is a US law designed to catch tax evasion by Americans holding money and investments overseas. If you’re a US citizen or green card holder, it’s important for you to know whether you need to file, which assets you must report, and what happens if you don’t do that.
In this article, we’ll break down the FATCA reporting thresholds, explain who qualifies for exemptions, and share all the information you need to stay in compliance with tax laws.
This article is brought to you by Taxes for Expats (TFX) – a top-rated tax firm serving US citizens, residents, and anyone with US tax obligations, both at home and abroad. Need help with FATCA reporting? Explore our articles or schedule your free discovery call for personalized support.
What is FATCA?
The Foreign Account Tax Compliance Act (FATCA) is a US law designed to combat tax evasion by US taxpayers holding financial assets outside the United States.
Enacted in 2010, FATCA requires foreign financial institutions and certain US taxpayers to report specified foreign financial assets to the Internal Revenue Service (IRS).
If you are a US citizen or resident with foreign financial accounts or assets exceeding certain thresholds, you must file Form 8938 annually to comply with FATCA obligations.
What financial accounts and assets are reportable?
One of the complexities of FATCA is identifying exactly which assets fall under its scope before you even get to valuation.
The IRS defines specified foreign financial assets as foreign financial accounts and non-account assets held for investment purposes, not assets used in a trade or business.
Specified foreign financial assets typically include:
- Foreign financial accounts – savings, checking, brokerage, or other financial accounts at foreign banks.
- Foreign stocks and securities – shares or securities issued by foreign corporations, including stocks you own in a foreign company or bonds issued by a foreign government or entity.
- Foreign financial instruments and contracts with non-US persons – examples include foreign-issued promissory notes, options, derivatives, or contracts to acquire foreign stocks or securities.
- Interests in foreign entities such as ownership in foreign partnerships, foreign trusts, or foreign estates.
Foreign currency is not a specified foreign financial asset and does not need to be reported on Form 8938.
Before considering if you meet the reporting thresholds, you need to determine the fair market value of each asset. The IRS advises:
- Use periodic account statements for valuation when the asset is held in a financial account.
- For assets not held in an account, base the fair value on publicly available, verifiable information.
- For foreign pension or deferred compensation plans, value your beneficial interest on the last day of the tax year.
You must report all your specified foreign financial assets – including accounts, stocks, partnership interests, and foreign-issued life insurance – on Form 8938 if their combined total value exceeds $50,000 for single filers, with thresholds varying based on filing status and residency.
FATCA filing requirements by taxpayer type
US residents
If you live in the US, you must report foreign assets on Form 8938 if their aggregate value exceeds:
- $50,000 on the last day of the tax year, or
- $75,000 at any time during the year (single or married filing separately)
For married couples filing jointly, the thresholds increase to:
- $100,000 on the last day of the tax year, or
- $150,000 at any time during the year
US citizens and residents living abroad
If you live outside the US, the reporting thresholds are different. To qualify for these higher thresholds, you must meet the IRS’s presence abroad tests and have your tax home in a foreign country.
You must file Form 8938 if you hold foreign financial assets valued over:
- $200,000 on the last day of the tax year, or
- $300,000 at any time during the year (single or married filing separately)
For married filing jointly, the thresholds rise to:
- $400,000 on the last day of the tax year, or
- $600,000 at any time during the year
Due to FATCA’s extensive reporting requirements, many foreign banks have difficulties serving US taxpayers. For instance, Belgian authorities ruled that transferring US account holders’ financial data to the IRS violates EU privacy laws. As a result, some Belgian banks have restricted services for US citizens.
Consider keeping an account with a US bank that offers international services or consult the IRS list of financial institutions that comply with FATCA.
Who is exempt from FATCA reporting?
Certain individuals and financial assets are exempt from FATCA reporting requirements.
If you are exempt from filing a US income tax return, you are automatically exempt from filing Form 8938.
Additionally, if you have already reported your interest in foreign entities on other IRS forms – such as Form 3520 (related to foreign trusts) or Form 8621 (for passive foreign investment companies) – you don’t need to duplicate that information on Form 8938. Instead, you can reference the previously filed form on Form 8938.
FATCA-exempt financial assets
You do not have to report the following under FATCA:
- financial accounts maintained by a US payor, including US branches of foreign financial institutions (FFIs), foreign branches of US financial institutions, and certain foreign subsidiaries of US corporations
- beneficial interests in foreign trusts or foreign estates
- foreign government-sponsored social security or similar programs
When you qualify for an exemption, you may need to include specific FATCA exemption codes on your tax forms to indicate the reason for the exemption. These codes help the IRS process your return accurately without unnecessary follow-up.
FATCA-exempt financial institutions
Some financial institutions are exempt from FATCA reporting obligations. These include certain US financial institutions, local banks with limited US clients, and foreign governments under specific agreements.
FATCA exemptions are limited and depend on specific criteria. To ensure you qualify for any FATCA exemption, consult with a tax professional familiar with expatriate tax law.
FATCA vs. FBAR: key differences
FATCA and FBAR (Foreign Bank Account Report) are two separate reporting requirements for US taxpayers with foreign financial assets.
Key differences:
- Reporting thresholds: FBAR has a $10,000 threshold, while FATCA thresholds vary based on residency and filing status (as detailed earlier in this article).
- Filing forms: FATCA uses Form 8938 with your tax return; FBAR is filed electronically with FinCEN.
- Assets covered: FATCA covers a wider variety of financial assets, whereas FBAR focuses solely on foreign bank accounts.
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Learn moreMissed FATCA reporting? Here’s what to do
Failing to file Form 8938 on time can lead to severe penalties. The IRS imposes a penalty of up to $10,000 if you don’t file by the deadline, including extensions.
If you still don’t comply within 90 days after IRS notification, additional penalties of $10,000 per month can apply, up to a maximum of $50,000. If you file jointly with your spouse, penalties apply to both of you as a single taxpayer.
If you can prove your failure to file was due to reasonable cause and not willful neglect, you may avoid penalties.
Penalties for understating tax related to undisclosed foreign assets
If you underreport income linked to undisclosed foreign financial assets, such as dividends from foreign shares not reported on Form 8938 or your tax return, the penalty can be 40% of the underpaid tax. In cases of fraud, this penalty rises to 75%.
Options for late filers
The IRS offers streamlined filing procedures for taxpayers who missed reporting requirements but want to comply voluntarily. These procedures cover late or amended tax returns and FBAR filings. Since Form 8938 is attached to your tax return, you should include it when filing under the streamlined program to address FATCA reporting.
If you missed FATCA reporting, you need to act promptly. Let's evaluate your situation – book a consultation with a CPA at Taxes for Expats.
Need help with FATCA compliance or exemptions?
FATCA reporting can be tricky. If you’re not sure whether you need to file or if you qualify for any exemptions, talk to a tax professional who knows the ins and outs of expat tax rules.
At Taxes for Expats, we’re here to help you navigate the process, stay compliant, and avoid any costly penalties.
FAQ
FATCA applies to all US taxpayers, including citizens, resident and non-resident aliens, who own overseas assets exceeding the reporting threshold. It also affects Foreign Financial Institutions (FFIs) dealing with US taxpayers, requiring them to report information about US taxpayers to the IRS.
Under FATCA, a US person can be a citizen, a resident, or a non-resident alien meeting certain criteria. It also includes US corporations, partnerships, or trusts. Determining US or non-US status can be complex, and consulting a tax professional is advised if you are unsure of your status.
Foreign financial assets should be reported on Form 8938, which needs to be attached to your annual income tax return, generally due on April 15. Expats may receive extensions under certain circumstances.
FATCA is mandatory for US taxpayers holding foreign financial assets above the threshold, which varies based on residential, marital, and filing status. FFIs and overseas banks holding US taxpayer assets must also comply with FATCA.
If you are exempt from filing a US income tax return for the year, you are automatically exempt from reporting under FATCA. Exemptions also include financial accounts maintained by a US payor, such as a foreign branch of a US financial institution, and certain interests in foreign trusts, estates, or government-sponsored social insurance.
