Enacted in 2010 by Congress to ensure U.S. taxpayers don’t hide money in foreign accounts to avoid paying taxes, the Foreign Account Tax Compliance Act (FATCA) is regrettably still a cause of confusion and misunderstanding.
In this article, we reveal eight crucial things you need to know about FATCA.
Let’s dive in.
1. FATCA is different from FBAR
Here’s how they are different:
The Report of Foreign Bank and Financial Accounts (FBAR) requires individuals whose foreign bank account balances, either individually or in aggregate, total $10,000 or more to file form FinCEN 114 with the office of Financial Crimes Enforcement Network (FinCEN).
FATCA reporting is more comprehensive. It requires US citizens who hold certain specified foreign financial assets (cash, investments, pensions, etc.) to report those assets to the IRS with their annual tax returns.
Under FATCA, the obligation to report financial assets outside the US’s borders—depends on your country of residence and whether you’re filing as a married person.
If you’re single and living outside the US and your foreign assets are greater than $200,000 on December 31 (or more than $300,000 at any time during the tax year), you’ll need to report them on Form 8938, Statement of Specified Foreign Financial Assets. These thresholds are doubled if you’re married and filing a joint return.
NOTE: Filing one form doesn’t exempt you from filing the other!
The IRS has a helpful table that points out the differences between these two forms.
Read more: FINCEN 114 vs. IRS 8938
2. The accounts or assets you should report
Not all foreign accounts or assets require reporting under FATCA! You should report only certain specified financial accounts or assets. But what does that mean?
According to the IRS, these generally include foreign bank accounts and foreign intangible assets you’re holding for investment.
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 safe 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 another helpful table outlining which assets qualify.
3. Foreign banks are reporting you to the IRS
Here’s how this works. Under FATCA, foreign banks and other financial institutions have to register with the IRS and commit to providing financial information on their American clients.
Financial institutions that don’t register with the IRS and commit to this kind of disclosure are subjected to a 30% withholding tax should they receive payments from the US.
Here’s how this might affect you.
Some financial institutions view this as an unnecessary burden that comes with costs, if not in money, in time.
As a result, to avoid this extra work, they choose not to deal with American citizens or, at best, limit their dealings.
Here’s what follows.
Having a foreign bank account may be difficult for a US citizen.
Read more: Holding a Foreign Bank Account as a US Expat
4. FATCA doesn’t only apply to Americans living abroad
This is worth repeating because many people think FATCA only applies to American expatriates.
The truth is, FATCA is not about residence. It is about foreign bank accounts and foreign financial assets, regardless of where you reside.
Of course, residence plays a role in establishing the threshold to determine whether you should file Form 8938.
For instance, compared to Americans abroad, American residents have a lower FATCA threshold: $50,000 for single American residents compared to $200,000 for their counterparts abroad.
For those who are married, American residents will be subjected to FATCA regulations if their joint financial assets total at least $100,000. For couples abroad, the minimum amount is $400,000.
5. FATCA doesn’t only apply to individual taxpayers
Aside from individual taxpayers, FATCA applies to certain corporate entities as well, including:
- – US-registered corporations
- – US-registered partnerships
- – US-registered trusts
Read more: IRS FATCA Summary
6. Non-compliance can be expensive
Failing to comply with FATCA regulations can be costly.
For instance, failure to file Form 8938 may mean you part with $10,000 in penalties to the IRS. And then, if you’ve been notified by the IRS of your failure to file Form 8938 and still have not taken action, you may pay an additional penalty of up to $50,000.
That’s $60,000 in penalties for failing to submit a tax form – just under the average annual income in the U.S.
7. You can legally opt out of FATCA. But it’s pricey.
Yes, you can opt-out of FATCA. And not just FATCA. But all tax laws in the US.
And that’s by renouncing your citizenship.
That’s what Daniel Kuettel, an American veteran who couldn’t open a bank account in Switzerland because of FATCA regulations, did.
But it doesn’t come cheap. Or easy. When you go you’ll be required to pay a non-waivable fee of $2,350 to the US embassy.
And here’s the catch. This amount is not refundable—even if your request to give up your passport is denied.
And beyond the money, there are legal requirements, a possible exit tax, and an elaborate process that goes with it.
8. Examine your cryptocurrency
If your crypto exchange isn’t based in the US and you meet the reporting thresholds, congratulations! You may have just triggered FATCA reporting requirements. Unfortunately the IRS has not yet formally taken a position on whether cryptocurrency is required to be reported on Form 8938, but when it comes to the IRS, you’re better safe than sorry.
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.
So, if you’re trading in cryptocurrency, this is something to keep in mind.
What should I do next?
Here’s a quick snapshot of what your next steps should look like as a US taxpayer abroad…
- Review your financial accounts outside the US.
- – Taxpayers who are unmarried or filing separately from your spouse: Calculate the total value of assets to see if they exceeded $300,000 at any time during the year or $200,000 at the end of the year
- – Taxpayers filing jointly with your spouse: Calculate the total value of assets to see if they exceeded $600,000 at any time during the year.
- If total assets are close to or exceed the reporting thresholds shown above, contact us to speak with an expert CPA. We’re eager to help!