FATCA – Everything Expats Need to Know

FATCA Foreign Account Tax Compliance Act Guide for US Expats - Tax Professional

If you’re a US expat living abroad, you’ve likely heard FATCA used as a bad word. And to be frank, it can quite literally ruin someone’s day – it significantly complicates US taxpayers’ day-to-day life abroad. 

Some context: The Foreign Account Tax Compliance Act (FATCA), is a law passed by US Congress in 2010 to help deter financial crime, boost tax compliance, and address offshore tax evasion. The law came into effect on July 1st, 2014, and is meant to build on the work of the Bank Secrecy Act of 1970. However, there have been several unintended consequences of the legislation, particularly for expats.

What is FATCA (Foreign Account Tax Compliance Act) to expats?

There are two key aspects of FATCA that affect US expats: 

  1. It requires individuals with financial assets abroad to report them when they file their federal tax returns.
  2. It requires foreign financial institutions (FFIs) including banks and investment firms to report their US account holders, allowing the IRS an effective method of monitoring expats’ foreign registered accounts.

How the IRS finds out about foreign accounts

Under FATCA, foreign financial institutions have to register with the IRS and commit to reporting the financial information of their American clients. 

FFIs that don’t register with the IRS and commit to this kind of disclosure are subjected to a hefty 30% withholding tax should they receive payments from the US, along with a possible ban from trading in the American money markets. 

Understandably, this penalty is quite effective in gaining cooperation from foreign financial institutions. However, some banks have resolved their obligation by refusing to service American clients (which of course only increases the challenges of the US taxpayer abroad). 

At this point, you may be wondering how the US can have such a powerful global reach – and you are not alone if you feel this is an overreach. In fact, the US’s dominant position in global financial markets allows the US to oblige foreign financial institutions to cooperate with its tax compliance initiatives. As a US taxpayer, it’s in your best interest to research carefully to fully understand the potential implications of FATCA for you. 

Expat overview: Understanding who qualifies as a US taxpayer

Unique among the vast majority of the world, the US utilizes a citizenship-based model of taxation. This means that if you hold a US passport or Green Card, you are required to file an annual tax return with the IRS – even if you reside outside of the United States. Most other countries use a residence-based model, meaning that where you reside is where you pay your taxes. The US’s model can make living abroad and staying US tax compliant extremely challenging, and perhaps no other group is as implicated as a group of American passport holders known as Accidental Americans. 

Accidental Americans and the US tax filing requirement

Accidental Americans are effectively foreigners born in the US who grew up abroad. They may also have been born abroad to a US parent who claimed US citizenship for them when they were a baby. Many have never lived in the US, and a common sentiment shared among Accidental Americans is that they do not even consider themselves Americans. So, you can imagine the frustration when they enter adulthood and encounter banking difficulties in their day-to-day lives as a result of their US citizenship. 

How FATCA unfairly implicates Accidental Americans

Because foreign banks and other financial institutions have to register with the IRS and provide financial information on their American clients, Accidental Americans are subject to providing the same identification documents as born-and-raised Americans, such as providing a Social Security Number. The catch here is that oftentimes, Accidental Americans simply don’t have one. This causes an impasse between them and their bank, often resulting in the freezing or outright closure of their account. This in turn may lead to problems with buying a house or accessing banking or credit facilities for their business. 

Moreover, many people learn that they are behind on filing US taxes at the same time they learn of their banking difficulties. This creates a hugely stressful and frustrating situation that requires time, effort, and, often, money to rectify. Fortunately, there is a strong and vocal community1 that Accidental Americans can join for support and guidance. (We also discuss how you can catch up on your US taxes penalty-free further down.)

Reporting foreign assets carries no additional tax implications; at its core, it’s an administrative exercise

Of note: The reporting threshold is significantly higher for expats than for Americans residing within the US. 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. 

Pro tip:

FATCA doesn’t only apply to Americans living abroad

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.

Below are a couple of tables to help you visualize the difference in filing thresholds. Kindly refer to the one with the title that describes your situation (US expat or US resident).

Form 8938 Filing Thresholds for US expats (living outside the US)

StatusLast day of the tax yearAny point during the tax year
Single or another status$200,000Over $300,000
Married Filing Jointly$400,000Over $600,000

Form 8938 Filing Thresholds for US taxpayers (living in the US)

StatusLast day of the tax yearAny point during the tax year
Single or Married Filing SeparatelyMore than $50,000More than $75,000
Married Filing JointlyMore than $100,000More than $150,000

Key takeaway with respect to the need to file Form 8938

There have been many unintended consequences of FATCA, many of which disproportionately affect US expats and Accidental Americans. However, it’s important to note that FATCA filing is not triggered solely by where a taxpayer resides – though residence does play a crucial role in establishing the threshold to determine whether you should file Form 8938.2

FATCA also applies to certain corporate entities

In addition to individual taxpayers, FATCA applies to certain corporate entities as well, including:

  • US-registered corporations
  • US-registered partnerships
  • US-registered trusts

Form 8938: Statement of Specified Foreign Financial Assets

FATCA is filed using Form 8938, which 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

Important callout

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

Accounts and assets to report 

According to the IRS,3 the following generally need to be included when reporting your foreign financial assets: 

  • Foreign financial accounts
  • Foreign pensions 
  • Foreign stocks and mutual funds
  • Foreign partnership interests 
  • Foreign-issued life insurance 
  • Foreign hedge funds 
  • Foreign real estate held through a foreign entity (You don’t need to report the real estate, but the foreign entity itself is a specified foreign financial asset, and its maximum value includes the value of the real estate) 

Assets you directly hold in your house, such as art collections and jewelry, do not need to be reported. They are also not taken into account when determining your reporting threshold.  

As a rule of thumb, assets that you directly hold do not qualify as reportable assets. This is true whether they are held for investments or not. It’s why real estate properties, such as rental houses, only qualify as reportable assets if owned by another entity – say a corporation, trust, or estate.

The IRS has a helpful table4 outlining which assets qualify. 

Holding cryptocurrency may trigger Form 8938 filing

The IRS has not yet formally taken a position on whether cryptocurrency is required to be reported on Form 8938. However, if your crypto exchange isn’t based in the US and you meet the reporting thresholds, it may be in your best interest to proactively file (or have your accountant file on your behalf). The bottom line: Many tax professionals will recommend that you’ll need to complete Form 8938 like you would if you held traditional currency in a foreign bank.  

FATCA non-compliance penalties

With the information provided by foreign financial institutions, the IRS is able to identify which Americans meet the Form 8938 threshold. Every month the IRS publishes a list5 of the financial institutions that are signed up and complying with FATCA by reporting their US account holder details to the IRS. The total number of institutions complying is now around 400,000 worldwide. These include any and every type of financial institution, including banks, funds, and investment and pension firms.

If somebody is obligated to file it but fails to, they’re subject to a $10,000 penalty. This penalty 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.

Using the Streamlined Procedures to catch up on filing US taxes

If you recently discovered that you are behind on filing your US taxes and the IRS has not yet reached out to you – that’s actually a good thing! The Streamlined Procedures are an amnesty program sponsored by the IRS that allows US taxpayers to catch up on their US taxes penalty-free, provided that they have the correct taxpayer profile. 

Partner with Bright!Tax to fulfill your US tax filing requirements 

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. 

US expat meeting expat tax accountant

Complete your US tax return with ease and confidence by partnering with Bright!Tax

Whether you need someone to file your US expat taxes, answer your questions, or help you with tax planning strategies, we’re here to help.

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  1. Association of Accidental Americans
  2. Do I Need to File Form 8938 Statement of Specified Foreign Financial Assets
  3. Summary of FATCA Reporting for US Taxpayers
  4. Comparison of Form 8938 and FBAR Requirement
  5. FATCA Foreign Financial Institution List Search and Download Tool
  6. What to do if you received a letter about FATCA reporting 
  7. FAQs – FATCA Registration System – IRS

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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.

  • 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
  • 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.

  • 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)

  • 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. 

  • 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.