It turns out that as an American living abroad, you still have responsibilities with the IRS. It’s true. The IRS expects you to report foreign assets and overseas accounts annually if you own them or maintain them. This additionally contains Foreign Bank Account Report (FBAR) filing and the knowledge round Foreign Account Tax Compliance Act (FATCA). If you know what to file and when you can save yourself from heavy penalties.
It’s FATCA time: What it means, who has to file, how to make sure you stay on the right side of the law.
What Is FATCA?
The law is titled the Foreign Account Tax Compliance Act, or FATCA, and is a U.S. law to catch an American who hides money overseas and doesn’t pay taxes on it. FATCA, otherwise known as the Hiring Incentives to Restore Employment (HIRE) Act, was introduced in 2010 and imposes reporting requirements on U.S. taxpayers and foreign financial institutions (FFIs).
If, as a U.S. taxpayer, you own foreign financial assets exceeding certain levels you must report them to the IRS on Form 8938. The law requires foreign banks and other financial entities to report on U.S. account holders or risk a 30% withholding tax on certain U.S. payments.
FATCA’s goal is straightforward: uncover hidden wealth. But it also has complicated rules. That’s why it is so important to know your FATCA filing requirements.
Why FATCA Matters
There’s a question you might be asking: Does this really apply to me? If you have foreign financial assets or accounts, the answer is: yes. FATCA is meant to ensure transparency, between the IRS and financial institutions globally. Non-compliance however has grave consequences.
Picture this: You accidentally don’t report your foreign account. And if they decide to, that’ll come with penalties as low as $10,000, but they can increase to a hefty amount. Ignorance isn’t an excuse. So let’s take a look at who needs to file under FATCA (Foreign Account Tax Compliance Act).
Who Needs to File?
U.S. Taxpayers Listed in the U.S.
Single or Married Filing Separately: If your foreign financial assets total $50,000 or more at year-end, and $75,000 or more at any time during the year, you must report them.
Married Filing Jointly: You must report if the total value of your assets as of the end of the year totals $100,000 or $150,000 during the year.
U.S. Taxpayers Living Abroad
Single Filers: You have to file if the excess in your foreign assets at the end of the year is $200,000 or more, or $300,000 or more during the year.
Married Filing Jointly: If your total is more than $400,000 at year-end or $600,000 for the year, report.
Domestic Entities
If your foreign financial assets exceed $50,000 at the end of the year or $75,000 for the entire year, then certain domestic entities, such as trusts and partnerships must also file.
Foreign Financial Institution (FFI)
U.S. account holders must be reported by banks, investment firms, and even some insurance companies to the IRS. Consequences for failing to comply can be a steep 30% withholding tax on such payments if they are from a U.S. source.
What is a foreign financial asset?
This part can get tricky. FATCA covers a broad range of assets, including:
- Foreign bank accounts
- Foreign stocks and bonds
- Mutual funds managed outside the U.S.
- Ownership stakes in corporations or trusts’ foreign entities
However, foreign real estate doesn’t count except when it’s owned through a foreign entity. A tax professional can even clear things up if you aren’t sure what to report.
Quick Tip: Penalties are at stake if you misreport or don’t report your assets. Before you file, always double-check your details.
FATCA Filing Requirements
For U.S. Taxpayers
You’ll need to file Form 8938, also known as Statement of Specified Foreign Financial Assets. With your annual tax return, you’ll get this form, which tells about your foreign accounts—their balances and any income they produce.
Remember: Filing Form 8938 will not substitute the filing of an FBAR (FinCEN Form 114). Unlike FBAR which applies to foreign bank accounts with balances over $10,000, FATCA expands its scope and does so at higher thresholds.
For Foreign Financial Institutions (FFIs)
Form 8966 needs to be filed by each FFI. It includes account balances, income, and U.S. taxpayer-related transactions. Also, FFI is required to be registered with the IRS and secure a Global Intermediary Identification Number (GIIN).
Penalties for Non-Compliance
FATCA penalties are no joke. Here’s what’s at stake if you don’t comply:
For U.S. Taxpayers
- Failure to File: Penalty of $10,000 for not filing Form 8938. For non-compliance, this can cost as much as $50,000 for repeat offenders.
- Underreporting Income: A 40 percent penalty on underreported amounts with respect to foreign assets.
- Fraud Penalties: Fraud bumps it to 75 percent of the owed unpaid tax.
- Criminal Charges: Non-compliance could be willful, meaning that hefty fines and, in bad cases, jail time might be in store.
Quick Tip: But act fast if you missed filing. If taxpayers voluntarily correct mistakes, they’re more lenient with the IRS.
Foreign Financial Institutions
Withholding Tax: It is non-compliance and means a 30% withholding tax on U.S. source payments.
Market Exclusion: FFIs that aren’t compliant may lose access to U.S. financial markets.
If You Missed Filing
You knew you forgot to file Form 8938. Don’t panic. Here’s what you can do:
File ASAP: As soon as possible, submit the delinquent form.
Consult a Professional: A good tax expert will be able to help guide you through the process and try to get you out of penalties.
Reasonable Cause Exception: The IRS waives penalties if you have a valid reason for non-compliance. However, you will need good documentation.
Final Thoughts
The FATCA filing requirements come with lots of time commitment both in terms of complexity and volume, and for expats living abroad, managing your FATCA filing is likely the last thing on your mind. And staying in the know is half the battle. We Need to know what our obligations are, file on time, and don’t hesitate to engage legal help at the right moments.
The fundamental of avoiding penalties is compliance. So long as you stay up to date with FATCA requirements, you save yourself from extra headaches — and get back to doing what matters most in your life, your work, and your goals.
