2020 FATCA News for US Expats
FATCA is the Foreign Account Tax Compliance Act, a 2010 US law that aimed to help prevent offshore tax evasion.
The law has had many unintended consequences though, particularly for American expats all around the world.
US tax rules for expats
The American tax system is unusual in that it requires American expats to file US taxes too, reporting their worldwide income.
To avoid double taxation (i.e. paying taxes to both the US and to another country), expats can claim certain IRS provisions such as the US Foreign Tax Credit when they file, which gives them a $1 US tax credit for every dollar of foreign tax that they’ve paid.
Another provision called the Foreign Earned Income Exclusion can be claimed by expats who don’t qualify to pay foreign taxes to reduce their US tax bill, often to zero.
Expats also have to report foreign businesses, gifts, and trusts, as well as their foreign registered bank accounts, investments and assets, depending on their values.
For example, Americans who have a total of $10,000 in foreign registered financial accounts at any time in the year, including accounts that they have signatory authority or control over even if not in their name, must be reported to FinCEN on an FBAR (Foreign Bank Account Report).
While Americans have been required to report their offshore accounts by filing an FBAR since 1970, FATCA sought to address the fact that the IRS had no way of enforcing the requirement.
The US government hoped that doing so would provide an incentive for more Americans with foreign income to report it, so increasing federal tax revenue, a priority following the 2008 financial crisis.
FATCA introduced a new reporting requirement for Americans with offshore assets that exceed certain thresholds, obliging them to report these accounts on IRS Form 8938 when they file their federal tax return (as well as filing as FBAR). The FATCA thresholds for expats to report their offshore assets start at $200,000 per person.
“FATCA was enacted in 2010 by Congress to target non-compliance by U.S. taxpayers using foreign accounts.” – the US Treasury
More significantly, FATCA also compels all foreign banks and other financial firms (such as investment firms) to report their American account holders to the IRS, including their contact and account balance details.
FATCA achieved this by imposing a tax on foreign financial firms that don’t provide this information when they trade in US markets (which, due to America’s financial global dominance, they all do). As a result, almost all foreign financial firms are now complying.
FATCA consequences for expats
FATCA forced foreign banks and investment firms to face a choice to avoid the new tax: they must either embrace the new administrative burden of reporting American clients to the IRS, or stop accepting American clients.
It is really a business decision for each firm: which option would cost them less. So for many foreign banks with a small number of American clients, it made more sense to close those accounts and not provide services to Americans any more.
This has resulted in thousands of Americans living overseas experiencing difficulties accessing foreign banking and investment services.
Under FATCA, foreign banks must also ask their American clients to confirm that they are up to date and compliant with their US tax reporting responsibilities. This has led millions of Americans to learn for the first time that they have to file US taxes from abroad.
Perhaps worst affected have been so-called Accidental Americans, foreigners born in the US or with a US parent who have never lived in the US or enjoyed the privileges of American citizenship. Hundreds of thousands of Accidental Americans have been told they owe US back taxes and that if they don’t comply they may lose their bank accounts.
FATCA news and updates in 2020
There are no announced or expected changes or reliefs from FATCA reporting in 2020.
US expats have little choice but to comply with their US reporting obligations, or risk penalties and possible foreign bank account closures.
IRS and particularly FinCEN penalties for not filing and reporting can be steep, and the IRS now knows who should be filing thanks to information received from foreign banks under FATCA as well as foreign tax information received from foreign governments.
Expats who haven’t been filing because they didn’t know that they had to can catch up without facing penalties under an IRS amnesty program called the Streamlined Procedure, so long as they do so before the IRS contacts them about it.