FATCA Enforcement: What US Expats Need to Know

02/03/2023

For Americans living abroad, US taxes may feel like an “out of sight, out of mind” type of situation. However, the US’s citizen-based taxation system means that all citizens and permanent residents must file a tax return, regardless of where they live. To make matters more complicated, living abroad often triggers additional tax requirements and regulations. The Foreign Account Tax Compliance Act (FATCA) is one such common hurdle American taxpayers living overseas commonly encounter. What’s more, the IRS has signaled that it will be stepping up enforcement of (FATCA), it’s more important than ever for expats to ensure that their taxes are complete, correct, and on-time. If not, they risk steep fines and penalties.

But what exactly is FATCA, and how might it affect you? Read on below for a primer.

What is FATCA?

FATCA is a 2010 law that requires all foreign financial institutions to disclose American account holder information to the US government in an effort to make it easier to identify and discourage tax evasion.

Is FATCA just for banks?

Beyond requiring foreign financial institutions to share information on American account holders, FATCA also requires Americans with a certain amount of assets in foreign financial accounts to report them on Form 8938 — so it affects taxpayers as well.

What are the filing thresholds for FATCA & Form 8938?

FATCA compels Americans residing within the US to file Form 8938 if they own $50,000 or more in foreign financial accounts. For Americans abroad, however, the reporting threshold is significantly higher. Expats must file Form 8938 only if their foreign financial assets exceed $200,000 on the last day of the tax year, or over $300,000 at any point during. This threshold doubles for jointly-filing, married couples to $400,000 on the last day of the year, or over $600,000 at any point during.

What does the Bank Secrecy Act of 1970 have to do with FATCA?

The Bank Secrecy Act of 1970 was passed by Congress as part of an effort to fight money laundering. The law requires financial institutions to keep thorough records, file reports, and report any suspicious activity that could indicate money laundering, tax evasion, or other financial crimes. It also requires Americans with $10,000 or more in foreign financial accounts to file a Report of Foreign Bank and Financial Accounts (FBAR) each year via FinCEN Form 114.

While FATCA wasn’t created as part of the Bank Secrecy Act of 1970, it did build upon the goal of deterring financial crime and boosting tax compliance by making it easier for the US government to monitor and investigate foreign financial accounts.

How does the IRS enforce FATCA today?

With the information provided by foreign financial institutions, the federal government is able to identify which Americans meet the Form 8938 threshold. If somebody is obligated to file it but fails to, they’re subject to a $10,000 penalty which can reach up to $50,000 if they continue to withhold payment after notification by the IRS. Americans facing a non-compliance charge may also be subject to a penalty of 40% if they underreport their assets thereby paying less than they are obligated to.

FATCA: Frequently Asked Questions

Want to learn more about FATCA? Find out the answers to some of the most frequently-asked questions below.

What’s the difference between FATCA and FBAR?

FBAR refers to a specific report that American taxpayers who meet the threshold must file, which was created as a result of the Bank Secrecy Act of 1970. FATCA, on the other hand, refers to an entire law — one that is separate from the Bank Secrecy Act of 1970.

How to stay compliant with FATCA as an expat?

It can be confusing to know whether you're compliant with FATCA as an American expat

Any American living abroad who meets the reporting threshold must file Form 8938 and include it along with their annual tax return.

What needs to be included when declaring FATCA?

Form 8938 has six different sections that must be completed:

Section I – Foreign Deposit and Custodial Accounts Summary: Detail the number of foreign financial accounts (both deposit and custodial) that you hold, along with their value, and whether any were closed during the tax year
Section II – Other Foreign Assets Summary: Report any other foreign assets you hold that are not either deposit or custodial accounts
Section III – Summary of Tax Items Attributable to Specified Foreign Financial Assets: Report the interest, dividends, royalties, other income, gains and losses, deductions, and credits related to your foreign financial accounts
Section IV – Excepted Specified Foreign Financial Assets: Indicate whether you have already reported specified foreign financial assets on a different form or forms within your tax filing
Section V – Detailed Information for Each Foreign Deposit and Custodial Account Included in the Part I Summary: Provide information on your foreign financial accounts like the financial institution name, type of account, account number, and more
Section VI – Detailed Information for Each “Other Foreign Asset” Included in the Part II Summary: Provide information on other foreign financial assets like asset type, maximum value, mailing address associated with it, and more

Form 8938 can be confusing, so if you have any doubts, don’t hesitate to contact a Bright!Tax expat-tax specialist.

How do I become compliant with FATCA?

If you were supposed to file Form 8938 in a previous year and didn’t, you may be able to catch up penalty-free through the IRS Streamlined Procedure. To qualify for this program, you must:

Have a Taxpayer ID number (usually your Social Security Number)
Not yet have been contacted by the IRS regarding a missing return or form
Attest that your failure to file was not intentional

The Streamlined Procedure requires you to file:

Your last three tax returns
Your last six years of FBARs (if you met the threshold)
Form 14653

The Best Way to Ensure You’re in the Clear With FATCA

Choosing Bright!Tax to handle your US-tax filing is an easy way to ensure you stay compliant with FATCA

US tax requirements are complex, frequently-changing, and enforced more tenaciously than ever. Any mistakes, late submissions, or missed tax exemptions can cost you significantly – even if they were unintentional.

To get your taxes in on time with minimal effort on your part and maximized tax exemptions, consider an expat US-tax filing service like Bright!Tax. Whether you need someone to file your taxes, answer your questions, or help you with tax planning strategies, we’re here to help.

Get started today and one of our tax specialists will reach out regarding next steps as soon as possible.