FATCA Reporting: Foreign Account Tax Compliance Act

The Foreign Account Tax Compliance Act (FATCA) is an essential piece of legislation for US taxpayers, designed by the US law to curb tax evasion by Americans having money and investments abroad. It requires the reporting of certain foreign financial assets by filing Form 8938 if the assets exceed the specified thresholds. FATCA was introduced as a measure to ensure transparency in foreign-held assets.

Filing Form 8938 is the main compliance responsibility under FATCA; hence, if you are a US citizen or a green card holder, you must determine whether you are obliged to file, which assets you need to report, and the consequences of not adhering to this regulation. In this guide, we will walk you through the FATCA reporting thresholds, what accounts you need to report, and everything you need to know to stay in compliance with the tax laws.

What is FATCA?

Short form for Foreign Account Tax Compliance, FATCA is a tax compliance act that is designed to oppose tax evasion by US taxpayers having their financial assets outside the United States. It includes citizens, green card holders, as well as certain resident aliens. Approved in 2010, FATCA requires foreign financial institutions and specific US taxpayers to report certain foreign financial assets to the Internal Revenue Service (IRS).

The FATCA Act particularly concentrates on foreign-held financial assets and safeguarding abroad accounts from being used for tax evasion. This US law designed act requires both individual taxpayers and foreign financial institutions (FFIs) to report certain foreign financial accounts, including bank accounts, mutual funds, life insurance policies, and annuity contracts.

If you hold a foreign financial account or assets that surpass the thresholds, you need to file Form 8938 every year to adhere to the FATCA requirements. Financial institutions all over the world are affected by FATCA, including credit unions, investment firms, and foreign entities involved in holding financial assets, unless they qualify for an exemption.

Some Key Features of FATCA

Here are some key features to consider regarding the Foreign Account Tax Compliance Act (FATCA):

• Mandatory Reporting: A US citizen and resident needs to report their foreign accounts and foreign financial assets on Form 8938 apart from filing an FBAR (if applicable).
• Institutional Reporting: ;The FATCA Act requires foreign financial institutions to identify and report the accounts held by a US taxpayer to the IRS, including account balances, income, and any other related details.
• Penalties for Non-Compliance: Not complying with the FATCA requirements can lead to penalties for both individuals and institutions. For FFII that fail to report, it might result in a 30% FATCA withholding tax. Additionally, individuals may have to face strict fines of nearly $50,000 and extended limitation statutes for IRS audits.
• Due Diligence Procedures: FATCA-enforced due diligence responsibilities on financial institutions. It includes verification of the account holder's tax status, collecting taxpayer identification numbers (TINs), and requesting U.S. tax residency certificates.

What Financial Accounts and Assets are Reportable?

Understanding and identifying which assets will fall under the scope of FATCA is one of the difficulties that arises before you even get to valuation. The IRS (Internal Revenue Service) has defined specified foreign financial assets as foreign financial accounts and non-account assets held for the purpose of investment, instead of assets used in a trade or business.

Specified Foreign Financial Assets Includes:

• Interest in Foreign Entities: Such as ownership in foreign partnerships, foreign trusts, or foreign estates.
• Foreign Stocks and Securities: Shares or securities issued by a foreign corporation, including stocks owned in a foreign company or bonds issued by a foreign government or entity.
• Foreign Financial Instruments and Contracts with Non-US Persons: Such as foreign-issued promissory notes, options, derivatives, or contracts to obtain foreign stocks or securities.
• Foreign Financial Accounts: It can include savings, checking, brokerage, or other financial accounts held at a foreign bank.

Now, before you consider whether you have reached the reporting thresholds, you must check the fair market value of individual assets. The IRS advises:

• Base the fair value on publicly available information that can be verified for assets that are not held in an account.
• Utilize a periodic account statement for valuation when your assets are held in a financial account.
• Value your beneficial interests on the last day of the tax year for foreign pensions or deferred compensation plans.

You are required to report all your specified foreign financial assets, including accounts, stocks, partnership interests, and foreign-issued life insurance, on Form 8938. This obligation is when the combined value goes beyond the limit of $50,000 for single filers, with thresholds differing depending on the filing and residency status.

Who Needs to Comply with FATCA?

The obligations of the FATCA act apply to the following:

• Green card holders
• Certain foreign entities that have US owners
• US citizens, including those who hold dual citizenship
• Resident aliens and non-resident citizens who meet the substantial presence tests.

Under citizenship-based taxation, US persons are liable to taxation on their worldwide income, regardless of the matter if they don't stay in the United States. The U.S tax obligations apply no matter what your residency status is.

Financial institutions and non-financial foreign entities (NFFEs) are also obliged to comply with the FATCA regulations. They must disclose either their U.S ownership or face withholding on some payments acquired from U.S sources.

What are the FATCA Filing Requirements?

Moving forward, let's understand the FATCA requirements by the type of taxpayer:

For US Residents:

If you reside in the United States, it is essential to report your foreign assets on Form 8938 if their combined value surpasses the following:

• $50,000 on the last day of the tax year,
• $75,000 at any time during the year (either single or married filing individually).

For couples who are married and filing jointly, the threshold limit increases to:

• $150,000 at any time during the year
• $100,000 on the last day of the tax year.

US Citizens and Residents Staying Abroad

If you are someone staying outside the US, the thresholds you need to report are different. You are required to fulfill the IRS's presence abroad tests and have your tax home in a foreign country to be eligible to qualify for these higher thresholds:

You should file Form 8938 if you hold foreign financial assets that are valued over:

• $200,000 on the last day of the year
• $300,000 at any time during the year (single or married filing individually)

For a married couple filing together, the thresholds may rise to:

• $400,000 on the last day of the year
• $600,000 at any time during the year

The reporting requirements of FATCA are comprehensive and complex, which makes it difficult for foreign banks that serve US taxpayers. For example, the Belgian authorities stated that transferring the financial data of a US account holder to the IRS violates the privacy of EU laws. Therefore, some of the banks in Belgium have restricted services for the citizens of the US.

Note: You can keep an account with a US bank that provides international services or contact the IRS list of financial institutions that adhere to the FATCA requirements.

Who is Exempt from FATCA Reporting?

Some individuals and financial assets are exempt from the FATCA reporting requirements. You will automatically be exempt from filing Form 8938 if you are exempt from filing a US income tax return. Moreover, if you have reported your interest in a foreign entity or any other IRS forms, you don't have to replicate that information on Form 8938.

Such as Form 3520 (related to foreign trusts) or Form 8621 (for passive foreign investment companies). Instead of that, you can utilize the previously filed form on Form 8938 as a reference.

FATCA-Exempt Financial Assets

Under FATCA, you don't need to report the following:

• Beneficial interests in foreign trusts or foreign estates
• Foreign government-sponsored social security or similar programs
• Financial accounts maintained by a U.S payor, including US branches of foreign financial institutions (FFIs), foreign branches of US financial institutions, and certain foreign subsidiaries of US corporations.

If you qualify for an exemption, you may have to include specific FATCA exemption codes on your tax forms to mention the reason for the exemption. Indicating these codes will help the IRS process your return correctly without asking for any needless check-ins.

FATCA-Exempt Financial Institutions

Some financial institutions may be exempt from the obligations of FATCA reporting. It includes some US financial institutions, local banks with limited US clients, and foreign governments under specific agreements.

The exemptions under FATCA are limited and may depend on certain criteria. To determine and ensure your eligibility for any FATCA exemption, you can contact a tax professional who has good knowledge of the tax laws for expatriates.

The Intergovernmental Agreement (IGA)

On February 5, 2014, the Canadian Government signed an intergovernmental agreement (IGA) with the U.S under the Canada-U.S. Tax Convention. It summarizes how the Canadian financial institutions adhere to the FATCA.

Main Points:

• The Intergovernmental Agreement (IGA) shifted reporting from the IRS to the Canada Revenue Agency (CRA), conducting an automatic exchange of the FATCA data.
• The Canada Revenue Agency started collecting data on 1st of July, 2015.
• The financial institutions in Canada started executing due diligence procedures on 1st of July, 2014.
• Under the IGA, retail clients are not liable for the withholding tax at a rate of 30%.
• FATCA is still applicable to U.S. persons staying in Canada, regardless of the differences in the Canadian tax laws.

What is the Difference Between FATCA vs. FBAR?

FATCA and FBAR (Foreign Bank Account Report) are two different reporting requirements for US taxpayers having foreign financial assets. Here are some of the main differences between FATCA vs. FBAR:

When Do You Need to File Both FBAR and FATCA?

A taxpayer might have to file both Form 8938 and Report of Foreign Bank and Financial Accounts (FBAR) if they hold foreign bank accounts or foreign financial assets that surpass the threshold limit for FATCA reporting and the FBAR limit.

For example, you must report foreign accounts on the FBAR, and other specified foreign assets held over the FATCA threshold on Form 8938.

What Happens If You Don't File Form 8938?

The IRS enforces strict penalties for those who don't comply with the requirements:

• A fine of $10,000 when initially failing to file.
• For non-continuous non-compliance, a fine of up to $50,000
• If income from foreign entities is not reported, then an Extended audit window.

The FATCA enforcement mechanism is supported by a global network of tax authorities in partner countries, ensuring adherence through automatic exchange of information. If you can prove that you failed to file due to a reasonable cause and it wasn't an intentional neglect, you may be able to avoid penalties.

Penalties for Understanding Tax Related to Undisclosed Foreign Assets

Suppose you underreport income, which is linked to an undisclosed foreign financial asset, the dividend acquired from foreign shares that are not reported on Form 8938 on your tax return. In such a case, the penalty can be up to 40% of that underpaid tax.

Additionally, the penalty may rise to 75% in case of any fraud.

Overdue Filers

The IRS has simplified filing procedures for those who missed the reporting requirements unintentionally but wish to adhere by choice. These procedure helps you to cover late or amended tax returns and FBAR filings. As Form 8938 is attached to your tax return, you must include it when you file under the streamlined program to manage FATCA reporting.

Contact the Experts

Whether you are a green card holder, a non-U.S. resident, or a dual citizen, understanding everything about FATCA reporting can be daunting. If you are not sure of your status, whether you need to file, or if you are eligible to claim any exemption, contact Savetaxs as we are here to help.

We have a team full of experts to assist and guide you so that you can meet your U.S. tax obligations with confidence. Our team has been working for decades now and can help you complete the process, stay compliant, and avoid any hefty penalties. Don't wait any further, contact us right away.