US Taxes for Expats – FATCA Filing Requirements in 2019
Americans who live abroad are required to continue filing a federal tax return each year, reporting their worldwide income, even if they’re also filing a tax return in the country where they’re living.
When expats file their federal return they can claim one or more exemptions that the IRS has made available by filing the relevant forms, to prevent double taxation.
The two most common exemptions expats can claim are the Foreign Tax Credit, which provides US tax credits to the value of foreign taxes already paid overseas, and the Foreign Earned Income Exclusion, which lets expats exclude the first around $100,000 of their earned income from US taxes. There are other exemptions available too, as well as credits such as the new Child Tax Credit. Which exemptions or credits an expat should claim depends on their unique circumstances, including where they’re living, their marital and family status, and their income types and levels.
Expats are also often subject to extra filing requirements, including those created under the 2010 Foreign Account Tax Compliance Act, more often referred to just as FATCA.
While Americans living abroad have been required to file a federal return reporting their worldwide income since the Civil War, in practice many expats never bothered, knowing that the IRS was unable to police their offshore finances anyway.
This also applied to FBAR (Foreign Bank Account Report) filing, an additional filing requirement for Americans to report their foreign bank or investment accounts, that was introduced in 1970 to help prevent offshore tax avoidance.
FATCA was introduced following the 2008 financial crisis with the aim of letting the federal government know about Americans’ finances worldwide to let it better enforce US tax filing rules and prevent offshore avoidance.
Unless you have been living under a rock for the last 10 years, you know that the IRS cares about offshore bank accounts. You have to declare them, and report the interest you earn even, if you don’t receive a Form 1099 from the foreign bank.” – Forbes
To achieve this, FATCA introduces a tax on transactions made by foreign financial institutions, including all banks and investment firms, when they trade in US markets. Due to America’s global dominance, almost all foreign financial firms are affected. To avoid the tax, they have to report their American account holders to the IRS, including contact and balance details.
This means the IRS can now compare this information with that provided on expats’ federal tax returns and FBARs, and so confirm that the information provided is correct and complete, or know if someone should be filing but isn’t.
FATCA filing requirements in 2019
FATCA has had a significant impact on US tax filing for expats.
Firstly, expats who weren’t previously filing now must or they can be hit with fines, which, if they don’t pay and the fines add up, as a final, draconian measure the Treasury can revoke their US passports.
In particular, expats have to provide their foreign banks and investment firms with confirmation that they are compliant with their US tax filing requirements. Most banks and foreign investment firms request this directly from their American clients.
Furthermore, FATCA specifies that expats who have a total value of foreign financial assets over $200,000 on the last day of the year, or over $300,000 at any time during the year, are required to report them (as well as an FBAR) on form 8938, which should be filed at the same time as form 1040.
Since introducing FATCA, the IRS has also introduced an amnesty program so that expats can catch up with their US filing requirements without facing any penalties so long as they do so before the IRS contacts them.
The program is called the Streamlined Procedure, and it requires expats to file their last three returns, their last six FBARS (as required), and to self-certify that their previous non-compliance wasn’t willful tax avoidance.