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:
- It requires individuals with financial assets abroad to report them when they file their federal tax returns.
- 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.
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)
|Status||Last day of the tax year||Any point during the tax year|
|Single or another status||$200,000||Over $300,000|
|Married Filing Jointly||$400,000||Over $600,000|
Form 8938 Filing Thresholds for US taxpayers (living in the US)
|Status||Last day of the tax year||Any point during the tax year|
|Single or Married Filing Separately||More than $50,000||More than $75,000|
|Married Filing Jointly||More than $100,000||More 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
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.
Learn if you qualify: Streamlined Filing Compliance Procedures: Catch Up on US Taxes with Confidence!
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.
- Association of Accidental Americans
- Do I Need to File Form 8938 Statement of Specified Foreign Financial Assets
- Summary of FATCA Reporting for US Taxpayers
- Comparison of Form 8938 and FBAR Requirement
- FATCA Foreign Financial Institution List Search and Download Tool
- What to do if you received a letter about FATCA reporting
- FAQs – FATCA Registration System – IRS