The Foreign Account Tax Compliance Act (FACTA) What U.S. Taxpayers With Foreign Assets Need to Know!
FATCA is the Foreign Account Tax Compliance Act. FATCA was enacted in 2010 to target non-compliance by U.S. taxpayers using foreign accounts. FATCA requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.
FATCA has two primary working parts. Part one requires foreign financial institutions to annually report to the U.S. government information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest. Part two requires U.S. taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS annually on an information return.
Since we doubt any of our readers are foreign financial institutions we will concentrate here on how part one affects U.S. taxpayers. While the nuts and bolts of the FFI reporting requirements do not require any action on the part of U.S. Taxpayers the results of this reporting have already been setting off alarm bells for all that thought offshore accounts would protect them from the prying eyes and sticky fingers of the IRS.
U.S. Taxpayers have always been taxable on their worldwide income, but before the introduction of FATCA many taxpayers ignored this assuming “what they don’t know about, I have no reason to tell them about”. The problem with this has always been that it was a crime to hide income from the IRS. FATCA make hiding from the IRS close to impossible and could expose some tax payers to criminal charges.
FATCA requires Foreign Financial Institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. In order to avoid withholding under FATCA, a participating FFI will have to enter into an agreement with the IRS to: Identify U.S. accounts, Report certain information to the IRS regarding U.S. accounts, Withhold a 30 percent tax on certain U.S. connected payments to non-participating FFIs and account holders who are unwilling to provide the required information. Registration began January 1, 2014. FFIs that do not register and enter into an agreement with the IRS will be subject to withholding on certain types of payments relating to U.S. investments. As I write this over 700,000 banks and 70 countries have already registered or signed reporting agreements. Many of the countries that have already signed have been consider tax havens with banking secrecy for many years by Americans. These countries include: Cayman Islands, Costa Rica, France, Germany, Mexico, Denmark, Ireland, Switzerland, Spain, Norway, Japan, Bermuda, Guernsey, Isle of Man, Jersey, Malta, and the Netherlands.
Anyone with an undisclosed foreign account that did not properly report the income may want to think about amending their tax return before then IRS get a chance to come looking for them.
Part two requires U.S. Taxpayers to report “specified foreign financial assets” that exceed a threshold amount in aggregate which they own, control or have beneficial interest in to the IRS. Specified foreign financial assets include: financial accounts maintained by foreign financial institutions and other foreign financial assets held for investment such as foreign stocks or securities, interests in a foreign entity, any financial instrument or contract that has as an issuer or counterparty that is other than a U.S. person, foreign pensions and deferred compensation plans, and certain foreign trusts and estates. Taxpayers that have specified foreign financial assets that exclude the threshold amounts must file for 8938 “Statement of Foreign Financial Assets” with their federal tax return. At this time only individuals (1040 Fliers) are required to file form 8938.
The reporting threshold for filing form 8938, for domestic taxpayers is:
- Unmarried taxpayers living in the U.S.: The total value of 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.
- Married taxpayers filing a joint income tax return and living in the U.S.: The total value of 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.
- Married taxpayers filing separate income tax returns and living in the U.S.: The total value of 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.
The reporting threshold for filing form 8938, for U.S. citizens with a tax home in a foreign country is:*
- You are filing a return other than a joint return and the total value of your specified foreign 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.
- You are filing a joint return and the value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.
* You are a U.S. citizen whose tax home is in a foreign country if you are either a bona fide resident of a foreign country or countries for an uninterrupted period that includes the entire tax year, or you are a U.S. citizen or resident, who during a period of 12 consecutive months ending in the tax year is physically present in a foreign country or countries at least 330 days.
Specified Foreign Financial Assets (SFFA) may be converted to U.S. Dollars using year-end spot rate for converting that currency for purposes of computing the filing threshold you must use highest fair market value during the year of the asset. For SFFA without a stated market or other valuation taxpayer must make a reasonable estimate of their maximum value. Except for taxpayers that elect the filing status of married filing jointly, joint owners of a SFFA generally each include the full value of the asset in their calculations for determining whether threshold is met and reporting the asset.
The following are considered to be Specified Foreign Financial Assets (SFFA) and are required to be reported on form 8938: Any financial account maintained by a foreign financial institution. Foreign bank accounts, Foreign mutual funds, Foreign hedge funds, Foreign private equity funds, Certain foreign insurance products and Other foreign financial assets held for investment that are not in an account maintained by a U.S. or foreign financial institution, namely: Stock or securities issued by someone other than a U.S. person, Any interest in a foreign entity, Any financial instrument or contract that has as an issuer or counter party that is other than a U.S. person, Foreign pensions and deferred compensation plans, Foreign trusts and estates (if “specified individual” is aware of its existence). Income from SFFAs which is reported on the tax return must also be identified on form 8938.
Form 8938 is only required to be filed if you must file a U.S. Income tax return. So a tax payer that had foreign accounts in excess of the applicable threshold but did not have enough gross income to require them to file a U.S. income tax return would not be required for file a 8938.
Duplicate reporting of SFFAs included on the following returns is not required: 3520, 3520-A, 5471, 8621, 8865 and 8891. But the SFFAs must still be included when determining if the filing threshold has been met.
The penalties that may be imposed for failure to file form 8938 when required include, a $10,000 civil penalty as well as an additional $10,000 continuation penalty for each 30 day period after the taxpayer is notified by the IRS of the failure to file (not to exceed $50,000). Failure to file can also result in criminal penalties.
Some relief from the civil penalty is available for those that can show the failure was due to reasonable cause and not willful neglect.
Information reported on your form 8938 for FBAR may and often does duplicate information already reported on FenCEN 114 for FACTA.
Note: U.S. Taxpayers including Expatriates with foreign assets should also review FBAR Reporting Requirements.