Foreign Account Tax Compliance Act (FATCA)
As you may have heard or seen in the media, the United States government has ramped up its efforts to combat tax evasion through a relatively new law known as FATCA.
The law has significantly influenced the information reporting relationships between the U.S. and foreign governments, and has had a profound effect on the global banking industry. The law also has practical tax compliance implications for U.S. expats with foreign accounts and assets.
Introduction to FATCA
FATCA stands for the “Foreign Account Tax Compliance Act.” FATCA was enacted in 2010 as part of the HIRE Act. The objective behind FATCA is to combat offshore tax evasion by requiring U.S. citizens to report their holdings in foreign financial accounts and their foreign assets on an annual basis to the IRS. As part of the implementation of FATCA, starting with the 2011 tax season, the IRS requires certain U.S. citizens to report the total value of their “foreign financial assets” on their personal tax returns by attaching Form 8938.
FATCA Reporting for U.S. Expats – IRS Form 8938
If you reside outside the U.S. and have a bank account or investment account in a foreign financial institution, you are generally required to include Form 8938 with your U.S. federal income tax return if you meet the following thresholds:
- You are filing a return other than a joint return and the total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year; or
- You are filing a joint return and the value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.
In addition to listing the accounts and their maximum values during the tax year, the form requires the taxpayer to list income reported on the tax return relating to the accounts. As to these, various tax items must be specified (interest, dividends, royalties, etc.), the amount reported must be provided, and the corresponding reporting on the tax return must be provided (i.e., which form and line or which schedule and line).
FATCA Reporting for Foreign Financial Institutions
In order to further enforce FATCA reporting, starting on January 1, 2014, foreign financial institutions (“FFIs”) (which include just about every foreign bank, investment house and even some foreign insurance companies) became required to report the balances in the accounts held by customers who are U.S. citizens.
To date, we have seen several large foreign banks require that all U.S. citizens who maintain accounts with them provide a Form W9 (declaring their status as U.S. citizens) and sign a waiver of confidentiality agreement whereby they allow the bank to provide information about their account to the IRS. In some cases, foreign banks have closed the accounts of U.S. expats who refuse to cooperate with these requests.
It is this renewed effort by the U.S. government to combat offshore tax evasion through FATCA that has led to a recent surge in tax compliance efforts by U.S. expats.