Do You Qualify for a FATCA Exemption?

FATCA, or the Foreign Account Tax Compliance Act, is a set of rules intended to enhance tax compliance by American taxpayers who hold financial assets outside the United States.

If you’re like many taxpayers with accounts or other financial activities abroad, you’d want to know whether FATCA applies to you so you can file the forms and reports necessary to stay in the good graces of the IRS. 

Tax compliance can be tricky. International tax compliance can be daunting. 

But you may be exempt from FATCA reporting requirements if you own one of these exempt assets outside the US. 

A financial account held by a US payor

Financial accounts held by a US payor are exempt from FATCA reporting requirements.

But what does that mean?  Who or what is a US payor? 

For digital nomads and US expats, the IRS defines a US payor as:

• 🏦 a US branch of a foreign financial institution and
• 🌍 a foreign branch of a US financial institution

An example of a US branch of a foreign financial institution would be Credit Suisse AG’s San Francisco branch.

On the other hand, an example of a foreign branch of a US financial institution would be a branch of a US bank, such as Bank of America. However, it’s challenging to find a real-life example of this. Banks overseas are typically registered overseas, despite the fact that their name might imply they’re US based (as is the case with Bank of America). 

Read more: Why are banks closing US expats’ accounts

According to FATCA, financial institutions aren’t limited to depository institutions like banks. That being said, they may be the most common. It also includes custodial institutions and investment entities which all fall under the broad meaning of a financial institution.

A beneficial interest in a foreign trust or a foreign estate (but with one condition)

You may be exempt from FATCA if you have a beneficial interest in what the IRS recognizes as a foreign trust or a foreign estate. 

However, ownership of a foreign trust or foreign estate is, unfortunately, not a get-out-of-jail-free card.  There’s a very specific condition to meet the exemption. 

You must be unaware and have no knowledge of your interest in the foreign trust or foreign estate. That would likely mean you’ve never received any notifications or income payments from the estate or trust. 

But if you receive a distribution from your foreign trust or foreign estate, you’re immediately deemed to be aware of your beneficial interest. And the IRS won’t believe any claims of not knowing. And this is where FATCA reels you in and subjects you to its reporting requirements.

An interest in the social security, social insurance, or another similar program of a foreign government

If you have an investment interest in the social security, social insurance, or a foreign government program of a similar nature, you’ll not have to report such investments under FATCA’s regulations.

The key here is that such an investment has to be through a government program. Think of the US Social Security program as an example. 

Naturally, this excludes investments in social security enterprises that are privately owned. It also excludes other non-US retirement or medical schemes.

Important to note: Many Americans working overseas are legally required to pay into government social security programs in some countries. This required participation remains exempt from FATCA reporting.

Here are FATCA’s other exemptions

Aside from the exemptions we’ve highlighted above, there are other instances when an American taxpayer may also be exempt from FATCA reporting. 

If you’ve already reported specified foreign financial assets on other IRS forms, there’s no need to report them a second time on Form 8938. 

Here are some examples of specified foreign financial assets you may have already reported when filing your tax return-

• Foreign corporations reported on Form 5471
• Foreign partnerships reported on Form 8865
• Trusts and foreign gifts reported on Form 3520 or Form 3520-A (filed by the trust), and
• Passive foreign investment companies reported on Form 8621

Read more: Understanding Form 5471

Based on reporting thresholds as well as the exemptions we’ve described, although you may not need to file your FATCA Form 8938, that doesn’t exempt you from annually filing an FBAR (Foreign Bank Account Report), also known as Form 114, with the US Treasury’s Financial Crimes Enforcement Network (FinCEN).

Read more: How to file the FBAR

Finally, there are other FATCA exemptions for certain trusts and certain assets held by bona fide residents of US territories, including Puerto Rico, Guam, and the US Virgin Islands.

How to value foreign financial assets

If your non-US assets don’t meet the FATCA exemption requirements, you’ll need to know how to value them when filing your US tax return each year.

In short, the IRS recommends the fair value method. This refers to the price you would sell the asset for on the open market. Generally, your account statement will do the trick to provide the value you must report on Form 8938. 

❓ What do you do if you don’t know the value of your foreign asset because it isn’t commonly traded? 

In that case, you’ll need an independent third-party appraisal or valuation. 

❓ But what about assets held in a foreign currency?

In this case, the IRS expects taxpayers to convert the value to USD using the Treasury Department’s Bureau of the Fiscal Service. If you don’t use the Treasury’s rates, you should disclose the source of the exchange rate you use on Form 8938.

What should I do next?

Take these quick steps now if you’re a US taxpayer living abroad:

1. Review all your non-US financial assets for any of the allowable exemptions.
2. Read our Ultimate FATCA Guide for Expats.
3. If you have non-exempt assets that need to be reported to the IRS, contact us! Our CPAs are here for you to discuss your options. Whether you’re doing this year’s tax return or you’re catching up, we love helping expats with their US taxes.

FAQ: FATCA Exemptions & Reporting