FATCA – Everything Expats Need to Know

You 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

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
• 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:

1. United States – FATCA Overview
2. Summary of FATCA reporting for U.S taxpayers
3. What Foreign Assets Must U.S. Taxpayers Disclose Under FATCA?
4. 2024 FATCA Reporting Requirements (What You Must Know)
5. Foreign Account Tax Compliance Act
6. Instructions for Form 8938
7. U.S. taxpayers residing outside the United States