FATCA for US Expats – The Ultimate Guide
FATCA is an acronym for the Foreign Account Tax Compliance Act, a 2010 law that had (and continues to have) a profound effect on US expats around the world.
FATCA had an even wider impact beyond just on US expats though, as it inspired a global endeavor known as the Common Reporting Standard whereby around 100 countries now exchange tax and banking information to help ensure that everyone who lives in any countries files and pays taxes where they’re supposed to. In short, FATCA hailed the end of international financial privacy.
Americans living abroad find themselves in a different situation to other nationality expats though, as the US requires all Americans to file reporting their global income, even if they live abroad and also have to file foreign taxes.
US reporting requirements for expats
Many US expats assume that they don’t have to file a US tax return for one of the following reasons:
– they don’t live in the US
– they don’t have any income arising in the US
– they are already paying foreign taxes, or filing a foreign tax return in their country of residence
– a tax treaty exists between the US and the country where they live
Unfortunately, none of these in fact prevent American living abroad from having to file a US tax return.
In fact, the same rules apply for US expats as for Americans living in the US: if an American citizen or Green Card holder earns a total of over $12,000 (the 2018 figure), or just $400 of self-employment income, worldwide, they are required to file a US tax return.
This means that many American expats have to file two tax returns, a foreign return as well as an IRS one.
To prevent American expats from paying taxes on the same income both to the US and to the country where they live, when they file their US tax return they can also file additional forms to claim one or more IRS exemptions or credits available for this purpose.
“FATCA was enacted in 2010 by Congress to target non-compliance by U.S. taxpayers using foreign accounts.” – the Treasury
These include the Foreign Earned Income Exclusion, which lets expats exclude the first around $100,000 of their earned income from US taxation, and the Foreign Tax Credit, which allows expats who pay foreign taxes to claim US tax credits up to the same value of the foreign taxes that they’ve paid.
After having claimed one or more exemptions or credits, most expats won’t owe any US tax, but they always have to file to achieve this, and which exemptions or credits they claim depends on the details of their situation.
As many US expats have to file a foreign tax return before they can file their US return, and foreign country tax filing deadlines vary, expats get an automatic US filing extension until June 15th, and they can request a further extension until October 15th if they need to.
Some expats have to file state taxes from abroad too, depending on the rules in the state where they last lived, which often depend on whether they’ve retained any ties in the state or whether they plan to return to live in that state again in the future.
Expats with a foreign registered business also have to report it, just as they would a US registered business. For a small foreign registered business to be considered ‘disregarded’ though (so an expat can report it on their individual tax return rather than separately), they need to file IRS Form 8832, whereas a US registered small business is automatically considered so.
Expats who work for an American firm or who are self-employed may also have to pay US social security taxes, however the US has signed treaties called Totalization Agreements with 26 other countries that mean that they will only either pay US or foreign social security taxes, depending how long they’re living abroad.
The history of enforcement of filing from abroad
Americans living abroad have been required to file US taxes since the Civil War. The rule was introduced to maintain federal revenues as many landowning taxpayers were fleeing abroad to avoid the war. Afterwards, it was never revoked.
It didn’t really matter though throughout the twentieth century, as the IRS had no way of knowing anything about expat Americans’ finances.
Nonetheless, in 1970 a new law was passed amid concerns about offshore tax evasion requiring Americans who had a total of over $10,000 in foreign financial accounts, counting all their foreign registered bank and investment accounts, to report all their offshore accounts each year by filing a Foreign Bank Account Report, more commonly known as an FBAR.
Similarly to the requirement to file US taxes from abroad though, FBAR filing was impossible to enforce.
Things began to change though with the digital revolution in the early years of the twenty first century, as more and more financial transactions began to be carried out online.
The 2008 financial crisis proved to be the catalyst for the IRS to act. In 2010, the government buried the Foreign Account Tax Compliance Act deep within the HIRE (Hiring Incentives to Restore Employment) Act, which was in general intended to provide business incentives to increase employment.
The rationale behind FATCA was to prevent offshore tax evasion by allowing the IRS to identify offshore accounts of US resident Americans. It was thought that simply giving the IRS this power would create an incentive for Americans with offshore accounts to just declare them and pay taxes on revenue generated by their offshore investments, raising new revenue for the country in a time of increased national debt.
FATCA implications for foreign banks
The way FATCA allows the IRS to identify Americans’ foreign registered bank and investment accounts is by requiring all foreign financial institutions, including foreign branches of US financial firms, report them directly to the IRS.
The way it works is that any foreign financial firm that doesn’t provide its American account holders’ details to the IRS is subject to a steep tax on any financial transactions that it carries out in US money markets.
Not having regulatory jurisdiction over foreign based banks though, Uncle Sam came up with an ingenious method of compelling them to comply by leveraging the global dominance of the US financial system.
In practice, this has proved a powerful incentive.
Knowing that, especially for larger firms, FATCA compliance would mean a new administrative burden, the law gave foreign firms several years to comply.
To date, over 320,000 foreign financial firms are complying, which means nearly every non-US bank or investment firm in the world.
The law requires that these firms provide their American account holders full name, date of birth, US social security number or ITIN (Individual Taxpayer Identification Number), their account number, the branch or location where the account is held, and their end of year (or sometimes maximum year) account balance.
The IRS has been receiving this information since 2016 tax year, and the implications are of course profound for all US expats, in that the IRS now has a much better idea where they live and how much they earn than previously.
Furthermore, over the last few years the US has signed tax information sharing agreements with many other countries.
FATCA implications for US expats
Expats have often found out about FATCA following a letter from their foreign bank or investment firm.
Seeking to ensure they meet their FATCA reporting requirements, thousands of foreign banks have written to their US expat clients asking them to provide their US social security number or ITIN, and to confirm that they are up to date and fully compliant with their US tax filing requirements. This in turn has meant millions more US expats realizing that they have to and consequently starting to file US taxes from abroad.
As well as compelling foreign banks to provide their American account holders’ information though, FATCA also created a new reporting requirement for many US expats.
Specifically, Americans with foreign financial assets that meet certain minimum value thresholds are required by FATCA to report them on IRS Form 8938 (as well as filing an FBAR).
These thresholds vary depending on whether someone is a single or joint filer. So for individual Americans living abroad, the Form 8938 minimum threshold is $200,000 of foreign financial assets at year end, or $300,000 at any time during a year. The figures are double for joint filers.
FATCA imposes specific penalties for Americans with qualifying foreign financial assets who don’t report them by filing IRS Form 8938.
These consist of a $10,000 failure to file penalty, applied per year, and a further $50,000 fine for continued failure to file following IRS notifications.
Because the foreign banks and investment firms where expats have their foreign financial assets are reporting directly to the IRS under FATCA too, the law allows Uncle Sam to compare expats’ Form 8939 declarations with those of banks.
“Under FATCA, certain U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets. There are serious penalties for not reporting these financial assets” – the IRS
The IRS can then look more closely at any person who either hasn’t filed but should have, or who has filed but the figures look different to those reported by their bank or investment firm.
Expats should note that neither FATCA Form 8938 filing, nor FBAR filing, imply any additional or new taxation; they are both just reporting requirements allowing the US to look into expats’ (and some US resident Americans’) finances and wealth abroad.
While FATCA has been effective in its aim of letting the IRS monitor Americans’ overseas assets globally, American expats haven’t been as appreciative of it as the IRS has, to say the least.
FATCA has in fact been greeted by what it’s fair to describe as torrent of outrage from US expats – and from many foreign banks – around the world.
The most common reaction is one of perceived overreach by what expats had previously considered their basically benevolent home country. For many Americans abroad, FATCA represents a major invasion of privacy, on a global scale, and furthermore a realization that there’s nowhere left to hide so they have to file US taxes.
For foreign banks, the cost of FATCA compliance has been huge, according to some estimates costing more money globally than the IRS has recouped in new tax revenue. Many foreign banks have in fact taken the view that the cost of FATCA compliance isn’t worth having US clients for, leading them to turn Americans away or close existing clients’ accounts. This in turn has left some American expats unable to access banking or credit services in the country where they live.
Even worse affected than most US expats are so called Accidental Americans – foreigners who happened to be born in the US but never subsequently lived there or taken up any of the emblems, rights or privileges of US citizenship.
Due to having the right to US citizenship, they are still counted as Americans in the eyes of the US tax system though, and are required to file US taxes on their worldwide income for life.
The only way out for them is to renounce US citizenship, however this is an expensive process that also involves becoming US tax compliant first.
Several campaigns are underway to either repeal or mitigate the impact of FATCA, notably:
– A group of French Accidental Americans is lobbying the French government to exit FATCA, which, if successful, would set a global precedent that other countries might follow.
– The EU has created a law that gives EU citizens control of the way their personal data is used, which might be contradictory to the concept of European banks providing financial data to the US.
– ACA (Americans Citizens Abroad) is campaigning for a law change in the US that would mean expat Americans not having to report their non-American income and assets.
It’s far from certain than any of them will achieve success though, for several reasons, including the financial global hegemony of the US; because the size and cost of implementing FATCA would be hard to reverse; and the fact that most other governments support the idea of international financial information exchange too.
Assessing FATCA’s success
Similar to Evelyn Waugh’s quote about the enjoyment of guns, whether FATCA should be considered successful or not depends entirely on which side of it you’re on.
FATCA has undoubtedly changed the world, having triggered an age of international, intergovernmental information exchange with the aim of preventing tax evasion. It has also however left many expats and Accidental Americans feeling hounded, violated even, with many potentially facing serious financial repercussions.
It’s estimated that FATCA hasn’t brought in a great deal of additional revenue to the US Treasury though, which was the original rationale, and this is surely the best criteria to measure its success against. So it has been a successful tool to let the IRS look at Americans’ financial accounts worldwide, but not to raise revenue, and it has also placed a large cost and burden on both foreign banks and expat Americans.
Courses of action
Many American expats first realize that they have to file US taxes from abroad when their foreign bank asks them whether they are up to date with their US tax filing, due to FATCA. Upon finding out, many expats then experience incredulity that they are required to file from abroad, as well as anxiety due to the possible consequences of not having been doing so.
The good news is that the IRS has established an amnesty program to let the many normal, law abiding Americans who haven’t been filing from abroad solely because they weren’t aware that they have to catch up without facing any penalties.
The Streamlined Procedure program requires Americans who are behind with their US tax filing to file their last three tax returns, and their last six FBARs (if applicable), and to self-certify that they were non-compliant non-willfully. When filing under the program, expats can also claim the exemptions or credits that mean that most won’t end up owing any US tax (and some even find that they can claim refundable tax credits too).
Filing US taxes from abroad is often complex due to the interplay with another tax system, and we recommend that American expats who have any questions regarding the US tax filing situation or obligations consult a US expat tax specialist at their earliest opportunity.