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FATCA reporting & filing requirements

FATCA reporting & filing requirements

What is FATCA?

Prior to the FATCA introduction, the US government relied on taxpayers for disclosure of their foreign financial assets. Lack of reporting led to losses in tax revenue which was estimated to be billions of dollars.

FATCA stands for Foreign Account Tax Compliance Act, which is a US law applicable to US taxpayers holding foreign financial assets and foreign financial institutions (FFIs) dealing with them.

In this article, you will learn about the FATCA reporting thresholds and the penalties for non-compliance.

What is FATCA reporting for Americans holding foreign financial assets?

FATCA reporting requires disclosure from US taxpayers holding financial assets offshore if it exceeds the reporting threshold. These are reported to the IRS on Form 8938. You can face substantial penalties if you fail to report them.

Let’s say you have an interest in specified foreign financial assets. Its aggregate value is more than the required threshold.

In this case you need to report these assets on Form 8938, which must be attached to your annual income tax return. It helps the tax authority to keep track of the offshore assets US taxpayers hold so they can collect taxes on them and prevent tax evasion.

NOTE! Once the IRS determines that you have an interest in the foreign financial asset they will ask you for its value. The IRS will presume the value exceeds the reporting threshold if you don't provide enough information.

Also - FATCA enhances tax compliance by requiring FFIs to report information about their US account holders to the IRS on an annual basis.

This has increased the compliance cost for FFIs resulting in them being reluctant to serve US clients.

What are threshold requirements for FATCA reporting?

To determine the reporting threshold you need to consider your:

  1. Residential status: whether you reside within the US;
  2. Marital status: whether you are single or married;
  3. Filing status: if married, whether you file your income tax return jointly or separately.
Reporting Threshold for Individual Taxpayers
  for taxpayers living in the US for taxpayers living outside the US
Single or married filing separately Holding foreign financial assets worth more than $50,000 - on the last day of the tax year / or $75,000 - at any time during the tax year will qualify you to report it. Holding foreign financial assets worth more than $200,000 - on the last day of the tax year / or $300,000 - at any time during the tax year will qualify you to report it.
Married and filing jointly The reporting threshold is more than $100,000 - on the last day of the tax year / or more than $150,000 - at any time during the year. The reporting threshold is more than $400,000 - on the last day of the tax year / or more than $600,000 - at any time during the year.

NOTE! If your tax home is in a foreign country then you must meet one of the presence abroad tests to qualify for reporting.

Reporting Threshold for Domestic Entities
The domestic entity holding financial assets valued more than $50,000 - on the last day of the tax year / or more than $75,000 - at any time during the tax year is required to report them.

Exceptions to the FATCA reporting requirements

If you are exempt from filing a US income tax return you are auto-exempt from filing 8938.

You are also not required to duplicate the details if you already reported interest in foreign entities on other forms. In this case, you can list the submitted form within Form 8938.

You don’t have to report:

  • A financial account maintained by a US payor which includes:
    • a US branch of an FFI;
    • a foreign branch of a US financial institution;
    • certain foreign subsidiaries of a US corporation;
  • Beneficial Interest in a foreign trust or a foreign estate;
  • Foreign government-sponsored social security or similar programs.

Pro Tip. FATCA exemptions are limited and they depend on specific criteria. Consult with a tax professional to determine whether you are exempt from FATCA reporting requirements.

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What are FATCA filing requirements?

It is important to understand your FATCA filing obligations along with other reports you need to fill out and file related to your financial activity overseas such as FBAR.

Difference between FATCA and FBAR

FATCA is often confused with FBAR which is a report of foreign bank and financial accounts. Both are US tax laws but with a significant difference.

FATCA is filed with the IRS whereas the FBAR is filed with the US treasury department. If you don’t file FBAR by April 15 you get an auto extension till October 15.

Unlike FATCA, FBAR reporting is mainly applicable to foreign bank accounts.

FATCA primarily combats tax evasion while FBAR combats money laundering.

The reporting threshold for FATCA varies depending on the taxpayer’s filing status and residence as mentioned above.

On the other hand, you are required to file FBAR when the aggregate value of the financial accounts is more than $10,000 during the year.

Valuation of foreign financial assets for filing

One of the complexities involved before we get to valuation is finding out exactly which assets fall into the scope of FATCA.

The IRS states that:

Specified foreign financial assets include foreign financial accounts and foreign non-account assets held for investment (as opposed to held for use in a trade or business), such as foreign stock and securities, foreign financial instruments, contracts with non-U.S. persons, and interests in foreign entities.

NOTE! Foreign currency is not a specified foreign financial asset and therefore not reportable on Form 8938.

Before considering the reporting threshold you need to know the monetary worth of the financial asset. You need to look at the asset's fair value.

You may determine the fair value based on periodic accounts statements. If the asset is not held in a financial account the fair value is based on the information publicly available from verifiable sources.

The valuation of your interest in the foreign pension plan or deferred compensation plan is based on the value of your beneficial interest in it on the last day of the year.

NOTE! The total value of the assets must be determined first in foreign currency and then converted into US dollars.

Banking issues when FATCA reporting

Due to the extensive FATCA reporting requirement foreign banks are reluctant to work with US taxpayers.

Some banks have adopted an avoidance strategy so they might refuse to open your bank account. This can be quite problematic for expats who are trying to be functional individuals in a foreign country.

Suppose you are a well-established expat and you already own an account in a foreign bank. You need to keep in mind that there is a possibility that your bank might drop your account and it can happen without a notice.

Pro Tip. Be prepared for times like this by keeping your account in one of the US banks. Refer to the list of financial institutions that agreed to comply with FATCA requirements.

Penalties for non-compliance with FATCA reporting requirements

The penalties for non-compliance with FATCA reporting requirements can be severe.

IRS will impose a serious penalty of up to $10,000 on you if:

  1. You fail to file form 8938 when it's due including extensions
  2. There is an understatement of tax relating to an undisclosed foreign financial asset.

1. Penalties for failure to file Form 8938

Once the IRS notifies you of the failure to file and you still don’t comply within 90 days there is an additional penalty of $10,000 for each month during which you failed to file it.

NB! The maximum penalty can reach up to $50,000.

If you can prove you have a reasonable cause for not filing and it wasn’t wilful neglect then you can avoid it.

NOTE! In case you are married and file jointly the IRS will treat you and your spouse as a single person for the penalty.

2. Penalties for understatement of tax relating to undisclosed foreign financial asset

Let’s say you own shares in a foreign corporation and received a taxable distribution. You neither report the interest you hold on form 8938 nor the distribution on your income tax return.

In this case, you have underpaid your tax involving an undisclosed foreign financial asset.

Your penalty might be equal to 40% of that underpayment. However, if the underpayment is due to fraud you will pay a penalty of 75% of the underpayment.

NOTE! If you fail to file form 8938 or have underpaid taxes you may be subject to criminal penalties.

Seeking help

Filing FATCA involves lots of technicalities such as using valuation techniques for multiple foreign financial assets. You then have to verify their accuracy since it will determine whether or not the reporting threshold is crossed.

Also - the asset’s value may not have crossed the threshold limit in the preceding year but you need to review its fair value again this year to see if it has any tax consequences.

It may get overwhelming but our tax pros at Taxes for Expats can facilitate you in dealing with the complexity.

We will ensure that you fulfill your obligation in a timely manner to prevent any non-compliance which can result in heavy penalties.

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1. Is FATCA only for US citizens?

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.

2. Who is a US person under FATCA?

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.

3. When should I file FATCA?

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.

4. Is FATCA mandatory?

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.

5. Who is exempt from 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.

Ines Zemelman, EA
Founder of TFX