Foreign Account Tax Compliance Act (FATCA)
The Foreign Account Tax Compliance Act (FATCA) is pivotal in the United States’s ongoing efforts to combat tax evasion by U.S. persons holding offshore accounts and financial assets.
Understanding FATCA Requirements
FATCA mandates that certain U.S. taxpayers with financial assets outside the United States report those assets to the IRS using Form 8938, Statement of Specified Foreign Financial Assets. Failure to comply with these reporting obligations can result in severe penalties. Furthermore, FATCA requires specific foreign financial institutions to report directly to the IRS information about financial accounts held by U.S. taxpayers or entities with substantial U.S. ownership.
Reporting by U.S. Taxpayers Holding Foreign Financial Assets
FATCA mandates that certain U.S. taxpayers with financial assets outside the United States report those assets to the IRS using Form 8938, Statement of Specified Foreign Financial Assets. Failure to comply with these reporting obligations can result in severe penalties. Furthermore, FATCA requires specific foreign financial institutions to report directly to the IRS information about financial accounts held by U.S. taxpayers or entities with substantial U.S. ownership. Reporting by U.S. Taxpayers Holding Foreign Financial Assets.
U.S. taxpayers holding foreign financial assets with an aggregate value exceeding the reporting threshold (at least $50,000) must report information about these assets on Form 8938. The reporting thresholds vary based on filing status and residency status. For example, unmarried taxpayers residing abroad must report assets exceeding $200,000, while those living in the U.S. must report assets exceeding $50,000.
To ensure full tax compliance, taxpayers may also need to file a Report of Foreign Bank and Financial Accounts (FBAR) in addition to Form 8938. While there may be overlap in reporting requirements between Form 8938 and FBAR, each form has distinct rules, deadlines, and penalties for non-filing.
Specified Foreign Financial Assets
Specified foreign financial assets encompass a wide range of holdings that U.S. taxpayers must report under FATCA. These include, but are not limited to, foreign bank accounts, brokerage accounts, mutual funds, and certificates of deposit issued by foreign banks, all held for investment purposes. Additionally, foreign-issued stocks and securities, such as bonds issued by foreign corporations or governments, fall under this category. Financial instruments or contracts with foreign counterparties, like options or swaps, may also be reportable. Interests in foreign entities, such as partnerships, corporations, or trusts, held for investment purposes rather than active business operations, must be disclosed. It’s important to note that physical assets held directly, such as real estate or precious metals, are generally not considered specified foreign financial assets unless held through a foreign entity. However, indirect interests in such assets through foreign entities may need to be reported.
Accurate valuation of foreign financial assets is essential for FATCA compliance. Taxpayers may rely on periodic financial statements or reasonable estimates to determine asset values. The U.S. Department of the Treasury provides exchange rates to facilitate currency conversion for assets denominated in foreign currencies.
Streamlined Compliance Procedures: A Path to Compliance
The Streamlined Filing Compliance Procedures offer a valuable opportunity for non-resident U.S. taxpayers to rectify past filing omissions and come into compliance with U.S. tax laws, including FATCA requirements. These procedures are designed for taxpayers whose failure to report foreign financial assets and pay all tax due in respect of those assets resulted from non-willful conduct.
To be eligible, taxpayers must certify that their conduct was non-willful and that they meet specific non-residency requirements. The streamlined procedures involve filing amended or delinquent returns for the most recent three years and FBARs (Report of Foreign Bank and Financial Account(s)) for the most recent six years. Read more about FBAR requirements by clicking here.
A key benefit of these procedures is the waiver of penalties normally associated with late filings. However, taxpayers must still pay any tax and interest due. It’s crucial to note that once a taxpayer makes a submission under the streamlined procedures, they become ineligible to participate in the IRS’s Offshore Voluntary Disclosure Program. Therefore, careful consideration and potentially professional advice are recommended before proceeding with a streamlined filing.
Consequences of Noncompliance
Failing to comply with Form 8938 reporting requirements can lead to significant penalties, including:
A $10,000 failure to file penalty
An additional penalty of up to $50,000 for continued failure to file after IRS notification
A 40% 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 more than $5,000 attributable to a specified foreign financial asset from your gross income. Additionally, 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 after you provide the required information.
The IRS may, at its discretion, waive the penalty for failure to file Form 8938 if you can demonstrate that the failure to disclose was due to reasonable cause rather than willful neglect. The determination of reasonable cause is made on a case-by-case basis, considering all relevant facts and circumstances. Read more about Reasonable Cause Penalty Abatement by clicking here.