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In 2010 the Obama administration was successful in convincing world leaders to pass the Foreign Account Tax Compliance Act (FATCA), despite strong resistance from the international financial community.
With about nine million U.S. expats across the globe, this law has put U.S. related persons at a disadvantage to save and invest their hard-earned money while living abroad, thereby limiting their investment options on top of stiff penalties for non-compliance with FATCA guidelines.
Generally, tax paying non-U.S. residents are required to report any offshore accounts amounting to over $10,000 on their U.S. tax returns. Foreign financial institutions are also required to identify U.S. taxpayers and report assets held at their institution through the intergovernmental agencies or to the U.S. Internal Revenue Services. Failure of either party to comply with these regulations will result in penalties among other things.
When non – compliance is “non-willful,” inability to report form 8938 imposes a statutory $10,000 failure to file penalty, a $50,000 additional penalty for continuous failure to file after IRS notification, and a 40% penalty for tax understatement due to non-disclosed assets. This is in excess of the tax and interest that is owed. Non-compliance that is regarded “willful” may also result in criminal indictment.
If you exclude from gross income more than $5,000 attributable to a designated foreign financial asset, regardless of the reporting threshold or any reporting exclusions, the statute of limitations is extended to six years after you submit your return. Failure to file or disclose an asset on Form 8938, extends the statute of limitations for the tax year to three years after you supply the needed information.
While FATCA did not alter the established sanctions for inability to adequately report, including the FBAR and Form 8621 (PFIC report), it culminated in heightened implementation of these rules, and thus US expats should become acquainted with the serious repercussions correlated with this and several other disclosure rules prevalently required of Americans internationally.
FATCA mandated extra data reporting and withholding for payments made to certain international financial institutions and foreign organizations. FATCA is designed to make it easier for the US government, particularly the IRS, to track U.S. related persons and businesses who earn money from investments/deposits in foreign bank accounts.
It is crucial to understand if you are susceptible to FATCA. FATCA will impact you if you match one or more of the following inclusion criteria:
The FATCA reporting requirements are not simple. It is difficult to establish specified foreign assets. The Internal Revenue Service (IRS) defines the assets as accordingly:
The reporting thresholds differ depending on whether you submit a combined tax return or live overseas. If you are single or file separately from your spouse and have more than $200,000 in specified foreign financial assets at the end of the year and live overseas, or more than $50,000 if you live in the United States, you must file Form 8938. These thresholds are doubled if you file jointly with your spouse. You are deemed to reside abroad if you are a U.S. citizen whose tax home is in a foreign nation, and you have spent at least 330 days in a foreign country or countries in a 12-month period.
US expats must file Form 8938 if required to file income tax return and:
Form 8938 is in conjunction to the Treasury Department’s long-standing FBAR (Foreign Bank and Financial Accounts Report) obligation for financial assets maintained in foreign institutions that surpass $10,000. Form 8621 (Passive Foreign Investment Company – PFIC) must now be submitted annually for each distinctive PFIC investment, rather than solely in years where the PFIC investment generated dividends. For returns involving foreign-sourced income, the IRS audit statute of limitations has been stretched to six years which was previously for 3 years.
In conclusion, FATCA is another layer of hindrance from allowing U.S. related persons to invest outside the U.S. To avoid unnecessary expenses due to non-compliance with these laws, seek professional help from international accountants and cross border financial planners.