Summary of FATCA Reporting for US Taxpayers
The Foreign Account Tax Compliance Act (FATCA) is a 2010 United States federal law that requires all non-American foreign financial institutions (FFIs) and certain other non-financial foreign entities to report foreign assets held by any of their US account holders.
FATCA reporting is required for all US persons having foreign financial accounts or tangible and intangible assets. All non-US FFIs must search their records for customers that may have a connection to the US, including birth record indications or prior residency records.
The assets and identities of such persons must be reported to the Department of the Treasury and the Internal Revenue Service (IRS) on form 8938. FATCA reporting is applicable to all US residents, citizens, and green card holders living in other countries, under the income tax law.
FATCA or Foreign Account Tax Compliance Act is meant for all US persons (citizens, residents, and green card holders) to declare any specified foreign financial asset held by them. Foreign financial institutions are also required to disclose the details of foreign assets held by their US account holders.
In this article, we will discuss all aspects of FATCA reporting: what it is, when and how to do it, and what happens if you are not compliant with it.
The topics covered here are:
- About FATCA
- FATCA Reporting: What and When
- FATCA Reporting Thresholds (for taxpayers living abroad and in the US)
- Specified Foreign Financial Assets for FATCA Reporting
- Exceptions to FATCA Reporting Requirements
- Valuing Assets for FATCA
- How Foreign Banks Report FATCA
- And, Non-Compliance to FATCA Reporting
About FATCA
The Foreign Account Tax Compliance Act was created as a part of the HIRE Act of 2010. Its aim was to uncover tax frauds that hid assets or money offshore. Through this act, the IRS has recovered billions of tax dollars from overseas housing assets or other properties.
FATCA reporting rules require all US citizens to file their foreign assets with the IRS if the asset or revenue crosses a certain threshold. This threshold is different for US residents and expats.
Apart from reporting individually, foreign financial institutions are also instructed to do FATCA reporting of the assets of American clients. Otherwise, they can be subjected to 30% withholding on payments that can be withheld from the US.
Although many people have called FATCA a violation of privacy as it requires reporting of assets and accounts used in daily life, it has been made a mandatory requirement to reduce tax evasion.
FATCA Reporting: What and When to Report
The IRS and Treasury Department are still developing guidance about FATCA and how to report it. Under this act, US citizens who have foreign assets are required to report it on Form 8938, Statement of Specified Foreign Financial Assets.
Failure to do so may lead to massive penalties. FATCA reporting comes in addition to the requirement to report foreign financial accounts on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), formerly TD F 90-22.1.
FATCA reporting also includes foreign financial institution reports about accounts held by US taxpayers or foreign entities in which US taxpayers hold a significant ownership interest. Such institutions include banks, investment entities, brokers, insurance companies, etc., apart from specific non-financial entities as well.
This is why any foreign institution asks about your citizenship before letting you open a financial account with them. For foreign institutions that do not have business outside their country of organization, FATCA reporting provides lessened reporting requirements.
However, a local foreign financial institution cannot discriminate against US citizens by declining to open their accounts just to get this favorable treatment.
When to do FATCA Reporting
FATCA reporting is required for certain US taxpayers with foreign financial assets if the reporting threshold exceeds $50,000. For these individuals, Form 8938 must be attached to their annual income tax filings. This threshold can vary in certain cases, including married taxpayers filing a joint income tax return and individuals living in a foreign country.
The exception to FATCA filing is for individuals who do not have to file an income tax return for the year. In that case, FATCA reporting is also not required, irrespective of the asset value. Additionally, if you report interests in foreign entities and gifts on other forms, you can simply list those forms on Form 8938, without repeating the actual information.
FATCA Reporting Thresholds
There are different FATCA reporting thresholds in the US, depending on whether you are filing an individual or joint income tax return, and whether you are a US resident or expat.
- You are required to submit a Form 8938 if you live abroad and have more than $200,000 of specified financial assets at the end of a year, both in case of single and joint filing
- If you live in the United States, this sum comes down to $50,000
- If you are filing with your spouse, these threshold amounts are doubled for FATCA reporting
You are considered to live abroad if you are a US citizen but your tax home is in a foreign country and you have been living in foreign countries for at least 330 days in a year.
FATCA Reporting for Taxpayers Living Abroad
You are required to do FATCA reporting if you file an income tax return and satisfy the following conditions.
- You are a married individual filing a joint IT return and the combined value of both your foreign financial assets is more than $400,000 on the last day of the tax year or more than $600,000 any time during the year
- These thresholds are applicable even if one spouse lives abroad but you are filing a joint income tax return. In this case, you file a single Form 8938 with details of all foreign financial assets
- You are not a married person and the total value of all your specified foreign assets is above $200,000 on the last day of the tax year or more than $300,000 any time during the year
FATCA Reporting for Taxpayers Living in the United States
Taxpayers living in the United States require FATCA reporting if they are filing an income tax return and fall under the following categories.
- You are not married and the total value of all your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 any time during the tax year
- You are married and filing a joint IT return, with foreign assets of more than $100,000 on the last day of the tax year or more than $150,000 any time during the tax year
- You are married but filing separate income returns with a total foreign financial asset value of $50,000 on the last day of the tax year or more than $75,000 any time during the tax year
- For the third scenario, the value of your specified foreign financial assets can be calculated by taking half of the value of any such assets owned jointly with your spouse. However, your Form 8938 must have the entire asset value
Specified Foreign Financial Assets for FATCA Reporting
The assets that fall under FATCA reporting standards are foreign financial accounts and foreign assets (non-account) held for investment, like foreign stock, securities, financial instruments, entities, and contracts with foreign individuals. This does not include assets held for use in business.
While considering FATCA reporting, include the following foreign assets for compliance.
- Direct stock and securities
- Bank accounts
- Stock accounts
- Life insurance
- Investment accounts
- Foreign pension
In the case of some assets, your FATCA reporting must be more detailed. For instance, a direct asset like a stock certificate needs more comprehensive reporting compared to a custodial account.
Exceptions to FATCA Reporting
There are some exceptions to the FATCA reporting requirements in the US. You do not have to report the following financial assets.
- Any financial account that a US payor maintains. A US payor can be a US branch of an FFI, a foreign branch of a US financial institution, or foreign subsidiaries of American corporations
- Any interest in social insurance, social security, or other similar programs of a foreign government
- Any beneficial interest in a foreign trust or estate if you are unaware of it
- Any trusts or assets held by residents of US territories
- Assets or accounts for which the Internal Revenue Code Section 475 holds mark-to-market elections
Apart from these exceptions, there are certain specified foreign financial assets that do not require FATCA reporting on Form 8938 if you have already reported them on other forms. These include:
- Foreign corporations reported on Form 5471
- Foreign gifts and trusts mentioned on Form 3520 or Form 3520-A that the trust has filed
- Foreign partnerships mentioned on Form 8865
- Passive foreign investment companies reported on Form 8621
- Registered Canadian retirement savings plans mentioned on Form 8891
Even though you do not have to report these again in Form 8938, all their values are calculated to determine the total asset value for the reporting threshold.
Valuing Assets for FATCA Reporting
The value of all your specified foreign assets must be calculated accurately to check whether it crosses the threshold of FATCA reporting. Ideally, you report an estimate of the highest fair market value of the assets during the tax year.
- FATCA reporting can be done on the basis of periodic financial account statements that help to determine the maximum value of a foreign financial account
- For a foreign asset not held in an account, you can check the year-end value to see whether it approximates the maximum asset value during the tax year
- There are special rules in place for reporting the maximum value of the interest of a foreign trust, retirement plan, or estate
- The fair market value of a specified foreign financial asset can be determined by information available publicly from reliable and verifiable financial information sources
- If no information is available, take a reasonable estimate of the fair market value for FATCA reporting
- Assets associated with any other currency than US dollars can be declared in terms of US dollars on the US Department of the Treasury’s Bureau of the Fiscal Service’s foreign currency exchange rates.
- IF the exchange rate for a foreign currency is unavailable, you can use another publicly available foreign currency exchange rate for conversion to US dollars.
- Determine the exchange rate by the value on the last day of your tax year.
FATCA Reporting for Foreign Banks
The IRS publishes a list of foreign financial institutions that are complying with FATCA by reporting the details of their US account holders. As of 2021, the number of institutions abiding by FATCA globally is 400,000, including banks, investment firms, pension firms, and funds.
The flip side of this is that such institutions often choose not to serve US nationals to avoid being subject to the FATCA reporting burden. As such, Americans cannot open accounts, buy property, or apply for loans in many places.
Another cause of concern is that Americans living abroad may not be comfortable sharing their bank and financial details like bank balances with the IRS regularly. This can be considered an intrusion by many people.
How Foreign Banks Abide by FATCA Reporting Requirements
If you are subject to FATCA reporting and associated with a foreign bank, the bank will ensure you stay compliant to avoid penalties and other actions. Banks generally take a few steps to inform customers about this requirement.
FATCA Letter from Bank
You might get a FATCA letter from the foreign financial institution with the IRS W-8 BEN and W-9 forms. Then, you may be required, as a US national, to certify under penalty of perjury whether you are a US person.
If you are a US citizen, legal permanent resident, expatriate, etc., the bank will send your account information to the IRS.
Direct Communication with the IRS
In certain cases, the foreign financial institution might not intimate the customer about the FATCA reporting requirements. Instead, if there is reason to believe that a customer is a US person, the bank might simply send their information to the IRS without information or permission.
FATCA Reporting Non-Compliance
There are severe penalties in case of FATCA reporting failure. If you have failed to file Form 8938, you are subject to a fine of “$10,000 per violation, plus an additional penalty of up to $50,000 for continued failure to file after IRS notification, and a 40% penalty on any understatement of tax attributable to non-disclosed assets.”
The statute of limitations has been extended to six years after return filing if you have omitted gross income more than $5,000 belonging to a foreign financial asset. In case you have not reported an asset properly on Form 8938, the statute of limitations is three years after providing the required information.
If you can prove the reasonable cause of failure, this time period can be extended only with regard to specific items and no penalty will be imposed. The reasonable cause will be determined on a per case basis, taking all facts into consideration.
- Expats can file under the Streamlined Filing Procedures in case of non-compliance. You must prove a lack of wilful motive in failing to do FATCA reporting to file under this program
- Expats unwilling or hesitant to disclose specified assets can do a “quiet disclosure.” However, if the IRS catches on, you will be ineligible to participate in the amnesty programs and subjected to large fine amounts
- If you are married and filing a joint income tax return, any failure in FATCA reporting will be actionable for both individuals. Your spouse will be jointly responsible for all non-compliance
If you do not carry out FATCA reporting accurately, the foreign financial institution may cost your account or freeze the money inside it until you confirm the status under penalty of perjury.
How Can Deskera Help You with US Sole Proprietorship Taxes?
Deskera Books is an online accounting, invoicing, and inventory management software that is designed with the sole purpose of making your life easier. It is a one-stop solution that caters to all your business needs like creating invoices, tracking expenses, getting insights through financial KPIs, creating financial reports and financial statements, and so much more.
This platform works exceptionally well for all the small businesses that are being set up or need some help, especially in accounting. Whether it is recording your operating income, account payable, account receivable, or even returns on investments, or it is about updating your debit and credit notes, Deskera Books has made it all very easy as well as accessible.
In fact, the software comes updated with pre-configured accounting rules, invoice templates, tax codes, and a chart of accounts, to name a few, which makes it super easy for you to comply with sole proprietorship taxation. Deskera Books will also allow you to transfer your data from your previous accounting software by just updating the details on the spreadsheet available on Deskera Books.
Deskera Books also allows you to add your accountants to your Deskera Books accounts for free. You will just have to invite them. Once they are in, they would be able to check your financial reporting and statements like profit and loss statements, income statements, cash flow statements, balance sheets, and bank reconciliation statements. Your accountants will be able to help you navigate through all the taxation regimes in a faster and more efficient way through Deskera Books.
Key Takeaways
The Foreign Account Tax Compliance Act (FATCA) is a 2010 United States federal law to keep a check on all specified foreign financial assets held by US account holders. It aims to reduce tax evasion by storing money or assets in offshore accounts.
FATCA reporting is applicable for all US citizens, residents, and green cardholders. The thresholds applicable to qualify for FATCA reporting via Form 8983 are:
- More than $200,000 worth of foreign financial assets (FFA) at the end of a tax year
- More than $50,000 FFA for US residents
- Double this amount for joint filings for married couples
The foreign financial assets that qualify for FATCA reporting are:
- Direct stock and securities
- Bank accounts
- Stock accounts
- Life insurance
- Investment accounts
- Foreign pension
The exceptions to this requirement include:
- Financial accounts maintained by a US payor
- Interest in social insurance, security, or foreign government programs
- Interest in a foreign trust or estate that you are unaware of
- Trusts or assets held by any US territory residents
- Assets or accounts under mark-to-market elections by Internal Revenue Code Section 475
- Foreign corporations reported on Form 5471
- Foreign gifts and trusts mentioned on Form 3520 or Form 3520-A that the trust has filed
- Foreign partnerships mentioned on Form 8865
- Passive foreign investment companies reported on Form 8621
- Registered Canadian retirement savings plans mentioned on Form 8891
All specified foreign financial assets must be valued accurately to avoid FATCA non-compliance or penalties, both by individuals and foreign banks.
In case of non-compliance, the penalties applicable are:
- $10,000 per violation
- $50,000 for continued failure
- 40% on an understatement of tax attributable to non-disclosed assets
If you miss the FATCA reporting requirements due to genuine reasons, you can file under amnesty programs like the IRS Voluntary Disclosure Program (New OVDP) and the Streamlined Filing Compliance Procedures.