What are the basics of Foreign Account Tax Compliance Act Filing to the IRS? What is FATCA? Many of our American expat clients find FATCA Reporting overwhelming and difficult to understand. The Foreign Account Tax Compliance Act (FATCA) is a US federal law that targets US persons concealing assets held in foreign accounts. You report FATCA as part of your 1040 tax return filing with the Internal Revenue Service (IRS). The foreign financial details will be recorded on form 8938. It is a filing requirement that should not be ignored. The Foreign Account Tax Compliance Act was created as part of the 2010 HIRE Act. As a result of FATCA legislation, the IRS has recovered billions of dollars owed from those housing assets overseas from American expats living overseas. Under the Foreign Account Tax Compliance Act, all US citizens must report specified foreign assets to the IRS if they exceed certain thresholds. These thresholds differ depending on whether the person is living in the US or abroad. In addition to reporting requirements for individuals, foreign financial institutions must also report their American clients’ assets to the IRS. Failure to do so can result in a 30% withholding on certain payments from the US. The primary goal of FATCA is to force American expat tax evaders to come forward. One of the unfortunate elements of the Foreign Account Tax Compliance Act filing is that some US ex-pats have been targeted and experienced additional scrutiny due to this tax legislation since 2010. It is perfectly reasonable that US ex-pats will have assets and accounts overseas as part of their daily lives. Because of the additional reporting, some have called FATCA a violation of privacy. The Foreign Account Tax Compliance Act has dramatically changed the financial and tax environment abroad for Americans. These changes cannot be ignored and have forced many Americans to consider maintaining more investments in the US. Who is Foreign Account Tax Compliance Act aimed at? FATCA is aimed at US persons. This broad category includes US citizens, US residents, Green Card holders, and Trusts controlled by US persons. For example, this includes British people who live in Florida within the United States of America. Foreign Account Tax Compliance Act regulations also mean that banks must screen all their clients to determine which ones appear to be US citizens. This must then be reported directly to the IRS. FATCA is a complex and broad set of rules designed to increase tax compliance by Americans holding financial assets outside the US. The legislation was drawn up mainly in response to the 2009 UBS offshore banking scandal, which highlighted that many Americans were maintaining significant financial holdings in Swiss bank accounts or paying the US taxes due on those overseas assets. The Foreign Account Tax Compliance Act created new self-reporting requirements and raised penalties for failure to comply with filing rules fully. The legislation imposes a new legal mandate on all foreign financial institutions to outline who among their clients are US persons and provide the IRS with information on those accounts. FATCA is backed up with harsh enforcement mechanisms to ensure that all non-US financial institutions adhere to the reporting requirements. US taxpayers are also subject to significant penalties if they fail to fully comply with the special rules relating to non-US financial assets. Foreign Account Tax Compliance Act legislation defines foreign financial institutions broadly and includes every financial institution outside the US. Captured under FATCA are banks, brokerage firms, trust companies, insurance companies, retirement plan administrators and mutual fund companies. Non-publically listed corporations and business entities registered outside the US but owned 10% or more by a US person must also report the details of the stake held by the US person meeting that threshold to the IRS. The IRS produces a useful summary of FATCA Reporting for US expat taxpayers living abroad, which is worth reviewing. What needs to be filed under FATCA? Expat American filing requirements under the Foreign Account Tax Compliance Act are classed as any specified foreign assets. Although this is quite broad, the IRS defines these assets as: – Foreign pensions – Foreign partnership interests – Foreign stockholdings – Foreign mutual funds – Foreign-issued life insurance – Foreign hedge funds – Foreign real estate held through a foreign entity It is important to note that your foreign home must not be filed under FATCA. Specified foreign financial assets also include foreign financial accounts and foreign non-account assets held for investment only. This covers foreign stocks and securities, foreign financial instruments, interests with foreign entities, and contracts with non-US persons. There are exceptions to the reporting requirements. You do not have to report the following assets as the IRS does not consider them to be specified foreign financial assets: – A financial account maintained by a US-based organisation, such as the US branch of a foreign financial institution, certain foreign subsidiaries of US corporations, or a foreign branch of a US financial institution. – A beneficial interest in a foreign Trust or Estate, if you do not know of the interest. – An interest in any social security, any social insurance or similar foreign government program. Comprehensive guidance from the IRS on the reporting requirements under FATCA for individuals, institutions and governments is worth researching. Are there reporting thresholds for Foreign Account Tax Compliance Act? Reporting thresholds under FATCA vary based on whether you file a joint income tax return or live abroad. If you are single or file separately from your spouse, you must submit a Form 8938 if you have more than $200,000 of specified foreign financial assets at the end of the year and you live abroad, or more than $500,000 if you live in the US. The IRS considers you to be living abroad if you are a US citizen whose tax home is in a foreign country and you have been present in a foreign country or countries for at least 330 days in a consecutive 12-month period. For taxpayers living abroad, you must file a Form 8938 if you must file an income tax return and: – You are married, filing a joint income tax return and the total value of your specified foreign financial assets or more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year. These thresholds apply even if only one spouse resides abroad. – Married individuals who file a joint income tax return for the year will file a single Form 8938 that reports all of these specified foreign financial assets in which either spouse has an interest. – You are not a married person filing a joint income tax return, and the total value of your specified foreign financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year. For taxpayers living in the US, you must file a Form 8938 if you must file an income tax return and: – You are unmarried, and the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. – You are married, filing a joint income tax return, and the total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than £150,000 at any time during the tax year. – You are married, filing separate income tax returns, and the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. How does FATCA affect Americans expats living abroad? American expats living abroad can self-report their foreign financial assets under the Foreign Account Tax Compliance Act legislation. This is particularly the case where Americans live in a country like the United Kingdom and have investments and savings accounts. The most common error made by Americans abroad is that since they have been hiding nothing, they must file the one FATCA-mandated reporting form. For many Americans living abroad, all they need to do is file Form 8938. Implementing the Foreign Account Tax Compliance Act has also made enforcing old rules applicable through FBAR and PFIC easier and more commonly enforceable. In the absence of any real sense of threat of enforcement, individuals and even some tax professionals have been ignorant of the rules. FATCA has ended this ignorance. Are there penalties for FATCA non-compliance for American expats? The IRS states that penalties for failing to file under the Foreign Account Tax Compliance Act are $10,000 per violation, plus an additional penalty of up to $50,000 for ongoing failure to file after being notified by the IRS, as well as a 40% penalty on any understatement of tax owed on non-disclosed assets. The most popular option for ex-pats to become compliant under FATCA reporting requirements is to file under the Streamlined Filing Procedures. This is an IRS program that allows innocent delinquent filers the opportunity to catch up without late filing penalties. An essential element of Foreign Account Tax Compliance Act legislation is the severe penalties that the law imposes on foreign financial institutions found to be non-compliant with the mandated reporting on the financial activity of their US clients. Foreign financial institutions not complying with the rigorous reporting requirements are subject to a 30% withholding tax on all US-sourced payments. Any financial institution in the world not voluntarily complying with find that 30% of any US-sourced payment will be withheld. US stocks and bonds are widely owned globally. This means nearly all financial institutions worldwide will receive US-sourced payments, mostly on behalf of clients who have no connection to the US. Seeing 30% of these payments being withheld by the IRS is not an option for foreign financial institutions. There has been almost complete compliance by foreign financial institutions with FATCA requirements. The Foreign Account Tax Compliance Act has meant a significant rise in the enforcement of these rules. Americans abroad should become familiar with the penalties for non-compliance. It is also advisable to speak to a specialist US tax expert who can assist you further in navigating FATCA. How can I avoid Foreign Account Tax Compliance Act? Avoiding FATCA is not an option if you wish to remain a US citizen. There are ways to minimise FATCA, including the following measures: – First, inventory all of your non-US assets and identify which ones are subject to FATCA Reporting by a foreign financial institution. – Make sure that these assets are not PFICs or foreign Trusts. – Move investment accounts to US-based financial institutions. – Build a diversified portfolio to account for long-term residency plans. What does FATCA stand for? FATCA stands for the Foreign Account Tax Compliance Act, a U.S. law designed to combat tax evasion by U.S. persons holding financial assets outside the United States. Who is required to comply with FATCA requirements? Financial institutions worldwide, including banks, investment entities, and certain insurance companies, are required to comply with FATCA. Additionally, U.S. citizens and tax residents must report their foreign financial accounts. What is the purpose of FATCA? The primary purpose of FATCA is to increase transparency and prevent tax evasion by requiring foreign financial institutions to report information about financial accounts held by U.S. persons to the IRS.
