FATCA BASICS FOR EVERY U.S. EXPAT
In the tax world, some people believe that the Congress added an extra letter to the word FATCA just so people would avoid characterizing it as a foul four letter word. Whether or not this is true, it has not prevented FATCA from becoming a serious concern for many U.S. expats. Therefore, it’s critical that, as an expat, you understand the implications of FATCA on your personal taxes.
WHAT EXACTLY IS FATCA?
FATCA stands for Foreign Account Tax Compliance Act and was enacted by the Congress in 2010 as part of the Hiring Incentives to Restore Employment Act (HIRE). The U.S. Treasury website states that the objective of FATCA is “to target non-compliance by U.S. taxpayers using foreign accounts.” Most expats I encounter often do not know about FATCA or seem to disregard it since, in their eyes, the FATCA legislation is really aimed at individuals with lots of money who are hiding this money from the IRS and U.S. Government by stashing it in offshore accounts. To the average expat with a humble savings or retirement account in their local foreign bank, FATCA may, in fact, be irrelevant. However, it’s worth gaining a basic understanding of the rules in order to make sure you’re compliant (if needed) and to avoid unnecessary and costly mistakes.
In a nutshell, under FATCA, all foreign banks are required to report information regarding accounts owned by U.S. citizens directly to the IRS annually. You may ask, how can the IRS (practically speaking) impose such a requirement on foreign banks? The answer is that under FATCA, foreign banks who do not comply will face stiff penalties imposed on their U.S. based assets and investments. From the individual taxpayer’s perspective, FATCA can trigger additional reporting on your U.S. tax return in relation to your non-U.S. bank accounts, investment accounts, and even pension accounts.
HOW DOES FATCA IMPACT MY TAX RETURN AND FILING OBLIGATIONS?
Starting on January 1, 2011, FATCA requires that all U.S. citizens with a “specified foreign financial account” include FATCA Form 8938 with their U.S. tax return provided they satisfy the following criteria:
- If unmarried and living outside the U.S. – your specified foreign financial assets is more than $200,000 on the last day of the year or more than $300,000 at any time during the tax year.
- If married and living outside the U.S. – your specified foreign financial assets is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year.
The term “specified foreign financial asset” includes financial accounts maintained by foreign financial institutions such as checking accounts, savings accounts, investment accounts, pension accounts and various types of deferred compensation accounts. In addition, FATCA may also apply to certain interests held in foreign corporations.
WHAT’S THE DIFFERENCE BETWEEN FATCA AND FBAR?
It is fairly common to confuse FATCA with FBAR. Both are reporting requirements related to foreign bank accounts held by U.S. citizens and require some form of reporting to the Government. One key difference is the purpose of the filings. Whereas FATCA reporting is part of the compliance mandated by the Internal Revenue Code, FBAR is technically a reporting requirement required under the Bank Secrecy Act. Another key difference (for individuals) is that FBAR is reported on Form 114 directly to the U.S. Treasury and is generally triggered by a much lower threshold (an aggregate balance of $10,000 in all foreign accounts). FATCA, on the other hand, is triggered for an individual only if you meet the criteria listed above and, if so, then the foreign account balances are reported on Form 8938 as part of your tax return. Finally, another key distinction is that FBAR is purely informational whereas the goal of Form 8938 is to pick up on unreported income earned on foreign assets by tying the assets to the income earned on those assets.
WHY DID I GET A LETTER FROM MY FOREIGN BANK?
As part of the implementation of FATCA among foreign banks, many U.S. citizens are receiving letters from their foreign banks asking them to sign two documents: (1) a Form W-9 confirming their status as a U.S. citizen and (2) a waiver of confidentiality whereby the client agrees to allow the bank to provide information about their accounts directly to the IRS (or the local tax authorities in the case of an Intergovernmental Agreement signed with the U.S.). It’s important to keep in mind that although you have no legal obligation to sign either document, the foreign bank will most likely threaten to shut down your account if you do not comply. In some cases, we’ve even seen banks freeze the account until the owner complied, although this may raise legal questions under local law. In other cases, a bank may unilaterally liquidate the U.S. shareholder’s account which can also cause unforeseen tax consequences.
PRACTICAL TAKEAWAY POINTS FOR EVERY EXPAT
- Don’t be complacent! Just because you do not fit the stereotype of a wealthy American stashing away cash in a Cayman Islands account does NOT mean you’re not subject to FATCA reporting (Form 8938). Failure to file Form 8938 can result in a penalty as high as $10,000.
- Make sure to report all of the income (as required) with respect to all of your foreign financial assets and accounts. Keep in mind special rules like the PFIC rules which may trigger the additional income for U.S. tax purposes. PFICs are much more common than most people expect. For example, foreign mutual funds, including investments held by ISAs (in the UK) and TFSA (in Canada) can be treated as PFICs!
- Be prepared to have to withdraw your money from your foreign bank if you do not wish to comply.
If you think you may have a Form 8938 requirement and you’re not sure how to complete the form, seek the help of a qualified professional who specializes in expat taxation. At Expat Tax Professionals we have the knowledge and experience necessary to help you navigate these complex forms and make sure your tax return is being filed accurately while limiting your exposure to unnecessary penalties.
To get help with your tax return, please visit expattaxprofessionals.com
