The Foreign Account Tax Compliance Act (FATCA) is an important development in U.S. efforts to combat tax evasion by U.S. persons holding accounts and other financial assets offshore. FATCA tax reporting 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. Some non-financial foreign entities also have to report certain of their U.S. owners. Therefore, if you set up a new account with a foreign financial institution, it may ask you for information about your citizenship.
Reporting by U.S. Taxpayers Holding Foreign Financial Assets
FATCA filing rules require certain U.S. taxpayers who hold foreign financial assets with an aggregate value of more than the reporting threshold (at least $50,000) to report information about those assets on Form 8938, which must be attached to the taxpayer’s annual income tax return. The reporting threshold is higher for certain individuals, including married taxpayers filing a joint annual income tax return and certain taxpayers living in a foreign country.
There are some exceptions to the requirement that you file Form 8938. For example, 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.
You may have to complete and file other reports about foreign assets, such as FinCEN Form 114: Report of Foreign Bank and Financial Accounts (FBAR) (formerly TD F 90-22.1), in addition to Form 8938.
What Are the FATCA Reporting Thresholds for Expats?
You are required to file Form 8938 if you must file an income tax return and one of the following is true:
You are married and filing a joint income tax return and the total value of 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 year. These thresholds apply even if only one spouse resides abroad. Married individuals who file a joint income tax return for the tax year will file a single Form 8938 that reports all of the specified foreign financial assets in which either spouse has an interest.
You are not a married person filing a joint income tax return and the total value of your specified foreign financial 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.
What Are Specified Foreign Financial Assets?
Specified foreign financial assets include foreign financial accounts and foreign non-account assets held for investment (as opposed to held for use in a trade or business), such as foreign stock and securities, foreign financial instruments, contracts with non-U.S. persons and interests in foreign entities.
You do not have to report the following assets because they are not considered specified foreign financial assets:
- A financial account maintained by a U.S. payor. A U.S. payor 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. Therefore, financial accounts with such entities do not have to be reported.
- A beneficial interest in a foreign trust or a foreign estate, if you do not know or have reason to know of the interest. 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 Requirements
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.
Valuation of Specified Foreign Financial Assets
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.
For reporting purposes, you may rely on periodic financial account statements (provided at least annually) to determine the maximum value of a financial account. For a specified foreign financial asset that is not held in a financial account, you may rely on the year-end value of the asset if it reasonably approximates the maximum value of the asset during the tax year. Special rules also apply for reporting the maximum value of an interest in a foreign trust, a foreign retirement plan or a foreign estate.
You may determine the fair market value of a specified foreign financial asset based on information publicly available from reliable financial information sources or from other verifiable sources. If no information from reliable financial information sources regarding the fair market value of a reported asset is available, a reasonable estimate of the fair market value will be sufficient for reporting purposes.
Non-Compliance with Form 8938 Reporting Requirements
If you must file Form 8938 and do not do so, you may be subject to penalties: a $10,000 failure-to-file penalty, an additional penalty of up to $50,000 for continued failure to file after IRS notification, and a 40 percent penalty on an understatement of tax attributable to non-disclosed assets.
The statute of limitations is extended to six years after you file your return if you omit from gross income more than $5,000 that is attributable to a specified foreign financial asset, without regard to the reporting threshold or any reporting exceptions. If you fail to file or properly report an asset on Form 8938, the statute of limitations for the tax year is extended to three years following the time you provide the required information. If the failure is due to reasonable cause, the statute of limitations is extended only with regard to the item or items related to such failure and not for the entire tax return.
If you make a showing that any failure to disclose is due to reasonable cause and not due to willful neglect, no penalty will be imposed for failure to file Form 8938. Reasonable cause is determined on a case-by-case basis, considering all relevant facts and circumstances.
Form 8938 Does Not Relieve Filers of FBAR Reporting Requirements
If you have a financial interest in or signatory authority over an offshore financial account, you must report the account on a Foreign Bank Accounting Report (FBAR) Form 114 (formerly TD F 90-22.1), regardless of your obligation to file Form 8938. Certain foreign financial accounts are reported on both FBAR and Form 8938. However, the information required by the forms is not identical in all cases.
To read more about FBAR requirements and the differences between FBAR and FATCA, click here.
How Expat CPA Can Help
FATCA reporting regulations for individuals are complex. We hope that the above information provides a general understanding of the FATCA requirements and Form 8938. We understand that everyone’s situation is unique, and only a qualified tax professional can ensure that all requirements are met and the form is filled out correctly and filed on time. That’s where Expat CPA comes in. We have the experience and up-to-date knowledge of this area of the tax code to make sure your FATCA tax reporting is complete, accurate and filed in a timely manner.
- FATCA Reporting (Form 8938): $125