Foreign Account Tax Compliance Act (FATCA): Definition and Rules

The Foreign Account Tax Compliance Act (FATCA) is mandated for the foreign banks exchange financial information with the U.S, which was passed by American legislators. Americans used to avoid paying their share of taxes easily by hiding money in the overseas banks.

If the value of your assets exceeds specified criteria and you are a U.S. citizen or holders of a green card residing abroad then you have overseas assets or foreign bank accounts, you might need to file Form 8938 when you file your U.S. tax return. In order to comply with these regulations, your foreign bank can ask you to complete a form W-9 for U.S. Taxes.

What is FATCA

The Foreign Account Tax Compliance Act (FATCA) is a law that mandates annual reporting on any foreign account holdings from American residents, whether they reside domestically or abroad. FATCA’s primary objective is to prevent tax evasion.

The Hiring Incentives to Restore Employment (HIRE) Act, which aims to enhance transparency in the world’s financial services industry, included the FATCA when it was passed in 2010. There are severe penalties for failing to report any foreign account assets, and Form 8938 is utilized to do so.

As a component of the HIRE Act in 2010, the Foreign Account Tax Compliance Act (FATCA) which was established with the goal of catching tax who were hiding money and assets in abroad. Paying certain international financial institutions and foreign companies requires new information reporting and withholding under FATCA. The IRS will be able to follow US citizens and corporations who receive income from investments or deposits in overseas bank accounts with the help of this initiative, which is intended to make this process easier for the US government.

The Foreign Account Tax Compliance Act (FATCA) is a piece of law which was designed to combat tax evasion in the US. It requires financial institutions around the world to exchange data about the financial holdings and interests of US citizens. In 2010, the IRS unveiled the FATCA, which went into force in 2014. By now, the majority of financial institutions, including your bank, will comply with FATCA, which requires them to exchange information with the IRS that is Internal Revenue Service which is the US tax collection department.

Key Points of FATCA

Informing customers of the new Foreign Account Tax Compliance Act law and it might affect their bank account; many Americans got letters from their banks. Numerous financial organizations have even decided not to work with US citizens as a result of the legislation. To become compliant and share information with the IRS would be too expensive for all of them.

Following are the key features of FATCA:

• The Foreign Account Tax Compliance Act (FATCA) mandates that Americans report their foreign account holdings annually and pay any taxes associated with them in order to prevent tax evasion.
• The FATCA tax revenues pay for the business incentives included in the 2010 HIRE Act.
• Any foreign account assets must be reported using Form 8938, and failing to do so carries severe penalties.
• Residents of the United States who fail to register overseas account balances over $50,000 in any given year and are liable to stiff fines.
• FATCA’s detractors assert that it unfairly burdens in foreign banks and financial institutions which must report on the assets of their clients.
• If their foreign assets exceed specific limits, US citizens must report them under FATCA.
• Fines could be imposed for failing to submit a FATCA report on time.
• You can become compliant if you’ve missed a deadline to submit and avoid the typical steep fees.

Why FATCA Was Created?

FATCA was established by the US Treasury to ensure that Americans living abroad adhere to US tax laws. The U.S. government determined that tax income was being lost by billions of dollars annually as a result of American taxpayers stashing money in foreign banks and other financial institutions before implementation. The Foreign Account Tax Compliance Act, which would oblige foreign nations to reveal any financial accounts maintained by Americans overseas, was created by the United States to address this issue.

The participation of other nations is essential to its success. Each participant nation ratifies an intergovernmental agreement (IGA) that includes FATCA into its national legislation in order for the entire system to function.

FATCA Reporting Requirements

Information pertaining to FATCA must be disclosed by both the people and financial institutions:

• FATCA Form 8938 may be required for individual U.S. taxpayers.

• Information regarding American citizens with accounts abroad must be disclosed by institutions. The specific IGA each nation has with the US will determine how they each go about doing it.

Who Needs to Comply With FATCA?

Any American taxpayer who has financial holdings of $50,000 or more is required to File Form 8938. These resources could be in the form of stocks, bonds, or other investments or they could be in a bank account.

Certain situations are an exception. One significant exemption is one for assets housed in a foreign branch of a U.S. institution or a U.S. branch of a foreign institution.

Foreign Institution

Foreign financial institutions (FFI) and non-financial foreign entities (NFFE) must abide by the law by informing the IRS or the FATCA Inter governmental Agreement about the identities of U.S. individuals who have accounts and the value of the assets in such accounts (IGA).

FFIs that fail to abide by the IRS’s rules will be barred from the American market and have a tax penalty of 30% of any withheld payments withheld from them. The revenue from the financial assets held by these institutions in the United States, such as interest, dividends, and recurring profits, may be included in withhold able payments.

Each account holder who satisfies the requirements of a U.S. citizen must have their name, address, tax identification number (TIN), account number, account balance, and any deposits and withdrawals for the previous year those who reported annually by FFIs and NFFEs that adhere to the law.

Individual Taxpayer Who are Living in Abroad

Under the following conditions, the IRS needs Form 8938 from taxpayers who are foreign-based:

• If you are a married couple filing a joint income tax return and the total value of your designated Foreign Financial Assets is greater than $400,000 on the last day of the tax year or greater than $600,000 at any time during the year. Even if only one spouse lives overseas, these thresholds still apply. A single Form 8938 is submitted by married people who file a joint income tax return for the tax year in order to report any specified overseas financial assets in which either spouse has an interest.
• If the total value of your designated foreign financial assets is greater than $200,000 on the last day of the tax year or greater than $300,000 at any time during the year but if you are not married and filing a joint income tax return, then you are considered to be a high-net-worth individual.

Individual Taxpayer Who Lives in U.S

Taxpayers who reside in the US must submit Form 8938 under the following conditions:

• The total value of your designated foreign financial assets is greater than $50,000 on the last day of the tax year or greater than $75,000 at any time during the tax year, and you are single.

• You are married and filing a joint income tax returns. On the last day of the tax year, or at any time throughout the tax year, the total value of your designated foreign financial assets exceeds $100,000.

• If you and your spouse file separate income tax returns and your specified foreign financial assets have a total worth of more than $50,000 on the last day of the tax year or more than $75,000 at any point in the tax year, you are married. If you are required to file Form 8938, you must declare the total value on that form.

What is FATCA Filing Requirements?

According to FATCA filing rules, if overseas assets surpass specific levels, all US citizens must report them to the IRS which is different for those who are residing in the US and those who are living abroad. Foreign financial institutions must report on the assets of their American clients in addition to their individual reporting obligations in order to avoid a 30% withholding on some payments from the US.

US citizens living in abroad are frequently targeted under FATCA, despite the fact that its main objective is to force tax evaders to come forward. Expatriates are logically expected to hold assets and accounts abroad given that this is a normal aspect of their daily lives. The Act has been accused of violating privacy because of the additional reporting requirements and the confidential nature of the reporting.

FATCA is nevertheless an obligation for all US citizens, including expatriates. Here are five suggestions for completing FATCA forms.

It Resembles FBAR But Differs From it

Similar to FATCA, the Foreign Bank Account Report (FBAR) is intended to catch tax evaders who use bank accounts abroad to hide money from the government. FBAR reporting is distinct because it relates to overseas accounts with balances of $10,000 or more (even if the accounts only had those values for a second!). If applicable, you must electronically submit FinCEN 114 by October 15 of each year. No other assets must be disclosed; FBAR only concerns bank accounts.

FATCA, however, is more extensive. The thresholds are substantially higher, but you still need to register your bank accounts and other foreign assets. If your assets reach the following amounts, you must submit a FATCA report:

• Lone Taxpayers Who Reside Abroad: $300,000 at any time during the year, or $200,000 on the last day of the tax year

• Married Tax Filers Who Reside Abroad: $600,000 at any time during the year, and $400,000 on the last day of the tax year

• Americans Who are Single and Pay Taxes: $75,000 at any time during the year or a $50,000 on the last day of the tax year

• Americans Who are Married and File Taxes: $150,000 at any time during the year, or $100,000 on the last day of the tax year

Finding out Exactly What Needs to be Reported is the Most Challenging Aspect of FATCA Reporting.

The reporting requirements for FBAR are simple; however FATCA reporting is more complicated. It is challenging to ascertain precisely what assets fall within that criterion in the context of specified overseas assets. The assets, according to the IRS, are:

• Pensions Paid Abroad
• Stocks held by Foreigners
• Partnerships with Foreign Parties
• Accounts with Foreign Money
• International Mutual Funds
• Insurance Policies issued Abroad
• International Hedge Funds
• Foreign Property owned through a Foreign Entity
• It is NOT Necessary to Report Your Foreign Residence

Some People May not be Able to Give up Their Citizenship in Order to Avoid FATCA

Many Americans are considering giving up their citizenship as a result of the growing awareness of FATCA intrusive nature. You will be released from FATCA reporting obligations by renunciation your US citizenship.

Renouncing will cost you $2,350. The cost to turn over your passport is $2,350. Some expats could find this amount to be prohibitive, in which case they will be forced to continue paying US taxes as citizens.

The second option is that you could be categorized as a covered expat, in which case you might be charged an exit tax.

It’s crucial to be aware that if you want to move abroad, you must demonstrate five years of tax compliance with the US. Therefore, if you are behind on your US taxes, you must catch up before applying for renunciation.

You Might Experience Banking Problems

Foreign banks may cause problems for Americans living abroad. The FATCA reporting requirements for banks have grown to be rather onerous; therefore many banks seek to completely dodge it by simply refusing to interact with American clients.

Whether or not US expats are established citizens, banks may not always find the reporting obligations to be worthwhile. It’s important for US citizens to be ready for the chance that they won’t be allowed to open accounts or that their present bank has dumped them without any notice, and to maintain a bank account in the US.

Financial institutions that have signed up for FATCA compliance and are providing US account holder information to the IRS are listed on a monthly basis by the Internal Revenue Service.

Punishments for Non-Compliance Are Severe

According to the IRS, there is $10,000 per violation, with an additional penalty of up to $50,000 for persistent failure to file after IRS notification, and a 40% penalty on an underestimate of tax attributable to non-disclosed assets” for failing to comply with FATCA regulations.

Filing under the Streamlined Filing Compliance Procedures is the most preferred choice for foreigners. This IRS initiative gives innocent late filers the chance to catch up without paying a late filing penalty. Under this program, filing is not subject to any limitations. You only need to affirm that you fail to file.

When it comes to filing back taxes outside of an IRS amnesty program and trying to slip in under the radar expats who are reluctant to disclose their existence to the IRS tend to silent disclosures.

Who is a U.S. Person Under FATCA?

The phrase “United States Person,” or USP, is used in the FATCA regulations. The following are examples of USPs are:

• An American National or Inhabitant
• Home-based Partnership
• A Domestic Company
• Estates other than those in Foreign Countries
• Any trust that allows one or more US citizens to have the power to decide all of the trust’s major decisions and where a US court can exercise primary oversight over the trust’s administration
• A client may be regarded as a U.S. resident for tax purposes based on the length of time spent in the U.S. under the substantial presence test. Every year that the person is in the country, must submit to the test.
• For a maximum of five years, students (F1, OPT, J1, and Q Visas) are regarded as non-resident immigrants and are excluded from the substantial presence criteria.
• Teachers and researchers (J1, Q Visas) are exempt from the significant presence test for a two-year term and are regarded as non-resident immigrants during that time.
• Holders of F and J student visas are exempt from the significant presence rule for five calendar years.
• Two years must be excluded for those on J Non-student visas.
• For other H1B, L1, and other visa holders, a foreign national must be physically present in the United States for at least 31 days during the current year and for 183 days during the three-year period that includes the current year and the two years prior to it, counting I all of the current year’s days and (ii) a third of the previous year’s days.

Penalties for Failure to Comply

Failure to Submit Form 8938 carries consequences. The IRS has the power to impose a $10,000 failure-to-file penalty, a further penalty of up to $50,000 if the guilty party continues to fail to file after being notified by the IRS, and a 40% penalty for understating taxes attributable to assets that were not disclosed.

The statue of limitations for unreported income above $5,000 due to a specified foreign financial asset is extended to six years after an entity submits its return. The statute of limitations for the tax year is also extended by three years after the due date if a party does not file or properly report an asset on Form 8938.

If there was a valid explanation for the failure, the statute of limitations was only extended for the item or items that were directly related to the failure, not for the entire tax return.

Although this is evaluated on a case-by-case basis, no penalty is levied if the omission to disclose is deemed to be justified.

Conclusion

U.S. citizens must submit yearly reports on any overseas account holdings under the Foreign Account Tax Compliance Act (FATCA), Whether they reside at home or abroad. Form 8938 must be completed and submitted to file. Different filing requirements and holding thresholds apply to people who reside in the United States vs. those who reside abroad. There are severe penalties for failing to file, so it’s critical to determine if you have assets located abroad.

Therefore, you can call us for assistance if you need it. Our knowledge will enable you to find a solution.

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