How Can US Expats Achieve FATCA Compliance?
When expats from most countries leave their homeland to live abroad, unless they still have income from back home, they no longer have to file a tax return in their home country (though they may well have to file one in their host country, if they meet tax residency criteria there).
Not so for Americans, who have the rare misfortune of having to continue filing US taxes from abroad as well as potentially filing taxes in their new country of residence.
While several IRS exclusions exist to mitigate for double taxation, Americans expats still have to file a federal return every year to declare their worldwide income, and file extra forms to claim the exclusions.
Furthermore, expats with a total of over $10,000 in foreign bank and investment accounts have to report them each year by filing a Foreign Bank Account Report, or FBAR.
While penalties for not filing federal returns and in particular FBARs are steep, many American expats continue not to file, either unaware of their obligation to file, or assuming that, seeing as they live overseas, they are effectively beyond the IRS’ jurisdiction.
FATCA is the Foreign Account Tax Compliance Act, a law passed in 2010 to help prevent overseas tax evasion. FATCA has however affected the lives of millions of ordinary Americans who happen to be living overseas in unforeseen and unwanted ways.
Two aspects of FATCA affect expats. Firstly, FATCA requires that any Americans with overseas financial assets with a value of at least $200,000 at any time during the tax year report them by filing for 8938.
“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
Secondly, and more controversially, FATCA compels foreign banks and investment firms to report their American account holders, including account balances and contact details, to the IRS.
This is achieved by threatening those firms that don’t comply with a 30% tax on any transaction they carry out in US financial markets. As a result, to date, over 285,000 foreign financial institutions are providing the IRS with their American account holder information.
This in turn means that the IRS now knows which expats should and shouldn’t be filing tax returns and FBARS, and where they live. For the first time, the IRS has global reach.
Some foreign banks, rather than take on the extra administrative burden of FATCA compliance, have simply refused services to Americans. This has left US expats struggling to find credit or banking services, or in some cases they have had their accounts suddenly closed.
In India meanwhile, non-FATCA compliant accounts are currently being blocked nationwide.
Most foreign banks and investment firms will by now have contacted their American account holders requesting confirmation that they are up to date with their US tax filing. If you haven’t returned this letter, you should do so at the earliest opportunity. (If you aren’t up to date with your filing, read on).
If you haven’t received such a letter, you should contact your foreign banks and investment firms and inquire about FATCA compliance, and they will provide you with more details.
Lastly, if you have foreign assets worth a total of at least $200,000 at any time during the tax year, not including tangible assets such as property, art, jewelry or cars, be sure to report them on form 8938 when you file your US tax return.
If being behind with your US tax filing is preventing you from complying with FATCA, there is an IRS amnesty program called the Streamlined Procedure that allows expats to catch up without facing the penalties that will be applied if the IRS catches up with them first.
To file under the Streamlined Procedure, you have to file your last 3 returns and last 6 FBARS (as applicable), pay any back taxes due (often none, once you’ve claimed the most beneficial exclusions given your circumstances), and self-certify that you’re previous failure to file was non-willful.
Having caught up using the Streamlined Procedure, you can then confirm to your foreign bank or other financial firm that you are US tax compliant, so averting the possibility of the IRS contacting you directly with a large back dated bill consisting of taxes, interest, and penalties. At this stage, it may be difficult or not possible to claim contest this or claim exclusions in retrospect.
If you have any doubts or queries regarding filing US taxes from abroad, we strongly recommend you contact an expat tax specialist.