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Connect on LinkedInYou may already know that Americans who earn above a certain threshold must file US tax returns, even if they live abroad. However, if you haven’t heard of FATCA before, you’re not alone. Even among expats who know they must file a US tax return, few understand the full extent of their US expat tax and reporting obligations.
That said, FATCA has significant implications for US expats. After all, failing to comply with FATCA reporting obligations can subject you to audits and expensive penalties by the Internal Revenue Service (IRS). As such, it’s well worth familiarizing yourself with tax laws like FATCA.
That’s where Bright!Tax comes in. As a dedicated tax firm for US expats, we know the ins and outs of FATCA — and we’re here to walk you through them. Read on to learn what FATCA is, how FATCA impacts US expats’ tax and reporting obligations, how to comply with it, and more.
What is FATCA?
FATCA stands for the Foreign Account Tax Compliance Act. Passed in 2010, this piece of legislation requires American citizens and permanent residents with foreign assets above a certain threshold to disclose them. FATCA also mandates foreign financial institutions to disclose information about accounts held by U.S. citizens, permanent residents, or entities with significant U.S. ownership to the U.S. government. In doing so, it aims to reduce offshore tax evasion and increase overseas tax compliance.
FATCA filing requirement thresholds
Expats whose foreign assets exceed the FATCA limits in value must disclose them on Form 8938: the Statement of Specified Assets. The exact reporting thresholds for FATCA vary depending on filing status and whether or not a taxpayer lives in the US.
For expats living outside of the US, FATCA reporting thresholds are as follows:
Expat FATCA thresholds
| Filing status | Foreign financial asset value |
| Single, married filing separately, head of household, qualifying widow(er) | Over $200,000 on the last day of the tax year, or over $300,000 at any point during the tax year |
| Married filing jointly | Over $400,000 on the last day of the tax year, or over $600,000 at any point during the tax year |
Americans living within the US are subject to FATCA as well, but at dramatically lower thresholds:
Stateside FATCA thresholds
| Filing status | Foreign financial asset value |
| Single, married filing separately, head of household, qualifying widow(er) | Over $50,000 on the last day of the tax year, or over $75,000 at any point during the tax year |
| Married filing jointly | Over $100,000 on the last day of the tax year, or over $150,000 at any point during the tax year |
Note: Whether you are considered to live abroad or in the US for Form 8938 is determined by the Physical Presence and Bona Fide Residence tests applied under the Foreign Earned Income Exclusion.
Which assets are subject to FATCA reporting?
You might be wondering: What specifically counts as a foreign financial asset for FATCA purposes?
A few types of assets that are subject to FATCA reporting include:
- Holdings in foreign bank and financial accounts (e.g. brokerage accounts, pensions, mutual funds)
- Note: Foreign financial accounts refer to financial accounts held outside of (i.e. registered/based outside of) the US. US-based accounts can have foreign holdings without qualifying as foreign financial accounts. Foreign branches or subsidiaries of US financial institutions also don’t count as foreign financial accounts
- Foreign stocks & securities not held in a financial account
- Contracts with non-US persons
- Foreign business & partnership interests
- Foreign financial instruments (e.g. bonds, commodities, derivatives, money market instruments, etc.)
- Foreign life-insurance policies & annuity contracts with cash values
- Interests in certain types of foreign trusts
- Note: US expats with interests in foreign trusts may also need to file Form 3520
Keep in mind that expats whose total foreign account balances exceed $10,000 at any point in the tax year must also file a Foreign Bank Account Report (FBAR). Foreign account holders can file this form (FinCEN 114) online.
Assets that are notably excluded from FATCA reporting include:
- Foreign real estate (unless owned by a foreign corporation or business in which the taxpayer holds interest)
- Foreign currency held outside of an account
- Precious metals
- Personal property (e.g. artwork, jewelry, car collection)
- Benefits from a social security program or similar
Note:
While the IRS has not clarified whether cryptocurrency is subject to FATCA reporting, it’s best to disclose when in doubt.
Foreign financial institutions’ role in FATCA
FATCA established intergovernmental agreements (IGAs) that compel foreign financial institutions (FFIs) and foreign financial entities (FFEs) with American taxpayer clients to share information on them with the US government. This makes it particularly important for US expats to stay on top of FATCA reporting.
It’s possible for Americans who are unaware they need to file Form 8938 to be brought to the IRS’ attention through the information their FFI or FFE shares with the US government. In such cases, they could face account closure and significant penalties.
FATCA penalties: What they are & how to avoid them
The vast majority of Americans who fail to comply with FATCA reporting obligations do so by accident. Typically, those who must file Form 8938 but don’t are simply unaware of the requirements. In other cases, an expat may not realize that the foreign assets they hold a) are subject to FATCA reporting or b) exceed the reporting thresholds.
Unfortunately, even accidental non-compliance can result in severe fines and penalties.
Penalties for FATCA non-compliance
The standard penalty for failing to file Form 8938 is $10,000 for each report you were required to file but didn’t.
If the IRS notifies you that you have failed to file when required to, you have 90 days to comply. After that, you will be subject to an additional penalty of $10,000 for each month (or part of a month) that you fail to file, up to $50,000. In extreme cases, you may even face criminal penalties.
Underpayments of tax due to undisclosed foreign financial assets can also result in a penalty of 40%.
Streamlined Filing Compliance Procedures
The best way to avoid FATCA penalties is to file Form 8938 accurately and on time when required. If you realize, however, that you’ve fallen behind on Form 8938 — or other aspects of your US expat tax filings — you may be able to catch up through an IRS amnesty program called the Streamlined Filing Procedure.
To qualify for this program, you must:
- Have a valid taxpayer identification number (TIN): For most US expats, this will be the same as their Social Security Number (SSN)
- Have a country of residence other than the US: Have lived outside the US for at least 330 full days and not maintained a US abode in at least one of the last three tax years
- Have non-willfully failed to comply: Your failure to file Form 8938 must have been non-willful (i.e. unintentional/accidental) due to a good faith misunderstanding of FATCA requirements
- Be in good standing with the IRS: Not be (and never have been) under investigation by the IRS
- Participate voluntarily: Not have already been contacted by the IRS regarding your outstanding tax and reporting obligations
To take advantage of the program, you must:
- File income tax returns for the last three years
- If you have already filed tax returns for the previous three years, you must submit an updated amended tax return (Form 1040-X) along with all required supplementary forms, schedules, and reports
- Note: On top of each delinquent or amended tax return, you must write “Streamlined Foreign Offshore” in red ink
- If you have already filed tax returns for the previous three years, you must submit an updated amended tax return (Form 1040-X) along with all required supplementary forms, schedules, and reports
- File FBARs for the last six years (as applicable)
- File Form 14653, certifying under penalty of perjury that your previous failure to comply was non-willful
- Submit the documents in paper form
- Pay any outstanding tax bills due (plus interest, if applicable)
After doing all of the above, you will once again be in good standing with the IRS. What’s more, you won’t need to pay any of the penalties typically associated with Form 8938 non-compliance.
Clarify & catch up on your tax & reporting obligations with Bright!Tax
FATCA is a critical component of your US expat tax and reporting obligations. Anyone with foreign assets subject to FATCA reporting that exceed the thresholds must file Form 8938. Failing to do so can result in significant penalties and in extreme cases, even criminal charges. Thankfully, the Streamlined Procedures offer a way for US expats to catch up penalty-free.
Resources:
- United States – FATCA Overview
- Summary of FATCA reporting for U.S taxpayers
- What Foreign Assets Must U.S. Taxpayers Disclose Under FATCA?
- 2024 FATCA Reporting Requirements (What You Must Know)
- Foreign Account Tax Compliance Act
- Instructions for Form 8938
- U.S. taxpayers residing outside the United States
FATCA - FAQ
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Is FATCA different from FBAR?
Yes. The Report of Foreign Bank and Financial Accounts (FBAR) requires individuals whose foreign bank account balances, either individually or in aggregate, total $10,000 or more to file form FinCEN 114 with the Office of Financial Crimes Enforcement Network (FinCEN).
FATCA reporting is more comprehensive. It requires US citizens who hold certain specified foreign financial assets (cash, investments, pensions, etc.) to report those assets to the IRS with their annual tax returns.
Read more about the FBAR in our guide.
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What should I do if I receive a FATCA notice from my foreign bank?
The type of notice a US taxpayer will receive depends on which bank is issuing the notice and where the bank is located, however, they will generally follow the following: (6)
- Requests for evidence of the taxpayer’s compliance with the US Tax Code
- Requests to provide a US taxpayer identification number (TIN)
- A note that the necessary account holder information will be transmitted with no further need for action
- Warnings that the account may be closed if the US taxpayer does not take appropriate action
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Is there an exemption to FATCA?
In 2019, two bills aiming to address the unintended consequences of FATCA borne by everyday expats were introduced.
The Overseas Americans Financial Access Act would introduce an exception for foreign banks having to report foreign accounts of Americans who are Bona Fide Residents in the country where the bank (or investment) account is.
The second bill was the Commission on Americans Living Abroad Act of 2019, which would establish a 10-person commission to review laws that have adverse effects on Americans abroad and to prevent new laws from being enacted that inadvertently harm non-resident Americans.
No action has been taken since the bills’ introduction to the House, meaning that for US expats, understanding exemptions on an individual level in consultation with a US expat tax expert is likely your best route.
Learn more about FATCA exemptions in our article.
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How do I know my FATCA status?
US taxpayers can check their status by creating and logging into their account, the FATCA Registration System. (7)
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How can I avoid FATCA?
Attempting to avoid FATCA by simply refusing to file or carrying on as if you were unaware of the requirement is not advisable – at best, failing to file will result in an administrative headache and some financial investment to rectify it down the line.
That said, if you feel strongly enough that the US government is overreaching, and perhaps you are an Accidental American or have no inclination to ever live in the US again, renouncing US citizenship may be an option. Successful renunciation will provide relief from the requirement to file an annual tax return with the IRS, however, doing so does require a significant amount of paperwork, including previous tax returns to prove that you are compliant prior to renouncing. This option will require careful planning and consultation with an expat tax expert in order to ensure your application to renounce is accepted.
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What is CRS & FATCA?
CRS stands for Common Reporting Standard and is the global standard for the exchange of financial account information. It is similar to FATCA in that it requires the sharing of account holder information between banks and its goal is to strengthen tax compliance.
However, it is different from FATCA because of the reciprocal nature of the Standard, whereas FATCA is a bilateral agreement extending between the US and each individual country with which it negotiated its agreement. All EU Member States are currently signed up to CRS (within the EU this is referred to as DAC 2).
It is important to note that being FATCA compliant does not mean you are also CRS compliant – ensuring that you are compliant with all necessary regulatory bodies begins with having an expert expat tax team, ideally with cross-border experience.
