The Foreign Account Tax Compliance Act (FATCA) is an important development in U.S. efforts to combat tax evasion by Americans holding accounts and other financial assets offshore. U.S. FATCA reporting, as outlined on Form 8938, is a required disclosure for individuals with total assets over a certain threshold.
Under FATCA, certain U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS on Form 8938: Statement of Specified Foreign Financial Assets. Serious penalties occur if these financial assets are not reported. This FATCA requirement is in addition to the long-standing requirement to report foreign financial accounts on Financial Crimes Enforcement Network (FinCEN) Form 114: Report of Foreign Bank and Financial Accounts (formerly TD F 90-22.1).
FATCA also requires certain foreign financial institutions to report directly to the IRS information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. The reporting institutions include not only banks, but also other financial institutions, such as investment entities, brokers, and certain insurance companies. Therefore, if you set up a new account with a foreign financial institution, it may ask you for information about your citizenship.
FATCA Reporting Requirements
When determining who is exempt from FATCA reporting, it mostly depends on where you live and whether you file a joint income tax return. Form 8938 filing requirements are more aggressive for taxpayers living abroad, while the threshold is doubled for married taxpayers filing joint tax returns. If you do not have to file a U.S. income tax return for the year, then you do not have to file Form 8938, regardless of the value of your specified foreign financial assets. Also, if you report interests in foreign entities and certain foreign gifts on other forms, you may just list the submitted forms on Form 8938, without repeating the details.
Depending on your situation, you may have to complete other reports about foreign assets, such as Form 114 on Foreign Bank Account Reporting (FBAR). It can be difficult to determine the difference between FBAR & FATCA, but it mostly depends on reporting obligations and specific thresholds.
FATCA Tax Reporting Thresholds
The 8938 filing thresholds for expats living abroad are as follows:
- Single individuals are required to file if their specified foreign financial assets exceed $200k at the end of the year, or $300k at any point during the year.
- Married couples are required to file if their specified foreign financial assets exceed $400k at the end of the year, or $600k at any point during the year.
The 8938-filing thresholds for citizens living inside the U.S. are as follows:
- Single individuals must file if specified foreign financial assets exceed $50k at the end of the year, or $75k at any point during the year.
- Married couples must file if specified foreign financial assets exceed $100k at the end of the year, or $150k at any point during the year.
What Are Specified Foreign Financial Assets?
Specified foreign financial assets include most foreign financial accounts, but also non-account assets held for investment. This generally includes:
- Depository or custodial institutions
- Offshore stocks and securities
- Investment entities (private equity or hedge funds)
- Sponsoring entities
- Foreign pensions
- Insurance with cash value products/annuities
You will need to determine the value of your specified foreign financial assets to know if the total value exceeds the threshold applicable to you. Generally, a reasonable estimate of the highest fair market value of the asset during the tax year is reported, but special rules apply to ease valuation burdens.
The following assets are not considered specified foreign financial assets, and do not need to be reported on:
- A financial account maintained by a U.S. payor. This includes a U.S. branch of a foreign financial institution, a foreign branch of a U.S. financial institution, and certain foreign subsidiaries of U.S. corporations.
- A beneficial interest in a foreign trust or a foreign estate if the interest is unknown. However, if you receive a distribution from a foreign trust or foreign estate, you are considered to have knowledge of your interest in the trust or estate.
- An interest in a Social Security, social insurance or other similar program of a foreign government.
Other Exceptions to the FATCA Reporting
If you reported specified foreign financial assets on other forms, you do not have to report them a second time on Form 8938. These include interests in:
- Trusts and foreign gifts reported on Form 3520 or Form 3520-A (filed by the trust)
- Foreign corporations reported on Form 5471
- Passive foreign investment companies reported on Form 8621
- Foreign partnerships reported on Form 8865
- Registered Canadian retirement savings plans reported on Form 8891
The value of the foreign financial assets reported on these forms is included in determining the total value of assets for the reporting threshold, but you do not have to list the assets on Form 8938. In this situation, identify on Form 8938 which and how many of these form(s) report the specified foreign financial assets.
Additional exceptions from reporting are made for certain trusts, certain assets held by bona fide residents of U.S. territories, and assets or accounts for which mark-to-market elections have been made under Internal Revenue Code Section 475. For example, a U.S. beneficiary of a domestic bankruptcy trust or a domestic widely held fixed investment trust is not required to report any specified foreign financial asset held by the trust on Form 8938.
Non-Compliance With Form 8938
Failing to properly file Form 8938 can lead to significant financial and legal consequences. If you do not file the form, you may face a $10,000 failure-to-file penalty. The IRS may also impose an additional penalty of up to $50,000 for continued non-compliance after being notified. You could also owe a 40% penalty on any underpayment of tax that is attributable to non-disclosed assets.
In some situations of non-compliance, the IRS will extend the statute of limitations for tax assessment. If, for example, you omit more than $5,000 of income attributable to an undisclosed specified foreign financial asset, the statute is extended to six years regardless of reporting thresholds or exceptions.
If you fail to file or properly report an asset on Form 8938, the statute of limitations is extended three years from when you provide the required information. However, if the failure was due to reasonable cause, the statute is extended only regarding the specific item(s) involved.
You can avoid penalties if you show any failure to disclose was due to reasonable cause and not willful neglect. Whether reasonable cause exists depends on the unique facts and circumstances of each case.
How Expat CPA Can Help
If you still have questions regarding Form 8938 or who needs to file FATCA, the experts at Expat CPA are seasoned professionals ready to lend a hand. We understand that everyone’s situation is unique, and only a qualified tax professional can ensure that all requirements are met, the form is filled out correctly, and all required forms are filed on time. We even offer expat tax consulting if the situation is more complex or if you require ongoing assistance.
Whatever the situation may be, don’t hesitate to contact us with questions or concerns — we look forward to hearing from you!