FACTA Filing: What U.S. Citizens Need to Know About Foreign Asset Reporting

by Jack Brister | Feb 6, 2020 | Taxes, 2020, Compliance, U.S.

FACTA Filing: What U.S. Citizens Need to Know About Foreign Asset Reporting

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

The Foreign Account Tax Compliance Tax Act (FATCA) became law in 2010 and is a major development in the taxation of Americans living abroad. FATCA is a tax law that requires U.S. citizens at home and outside of the United States (U.S.) to file annual reports on any foreign account holdings. FATCA is intended to prevent tax evasion by U.S. citizens and residents via the use of offshore accounts. The FATCA rules run parallel to the withholding rules applicable to any fixed, determinable, annual or periodical (FDAP) income of a nonresident alien or foreign corporation received from U.S. sources.

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. In addition to that, the U.S. person is required to report foreign financial accounts on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).

FATCA also requires certain foreign financial institutions to report directly to the Internal Revenue Service (IRS). Banks and other foreign financial institutions must report information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a 10{105615a82985984cf1704e8776ec685e1345b73ddec43811fd3f038097961455} or greater interest (defined as a substantial ownership interest).

FFIs and NFFEs

To comply with FATCA, all entities need to be evaluated to determine whether they fall under the definitions of Foreign Financial Institution (FFI) and Non-Foreign Financial Entity (NFFE).

FFIs are financial institutions that are foreign entities which are not defined as a U.S. person pursuant to U.S. tax law (U.S. Code Title 26, aka as the Internal Revenue Code (IRC)).

NFFEs are foreign entities that are not financial institutions, including territory entities. FATCA mandates that FFIs participate in the information-sharing network or face a 30 percent withholding tax on U.S.-source investment income (theirs or their client’s investment account income).

Thus, FATCA withholding will be imposed on any withholdable payments made to an FFI, unless they abide by the IRC and related U.S. Treasury Regulations or an Intergovernmental Agreement (IGA) between the U.S. and the FFIs country of residence. Therefore, if you set up a new account with a foreign financial institution, they will ask you for information regarding your U.S. tax residence and for proof of U.S. tax filing compliance.

Reporting thresholds vary based on whether you file a joint income tax return or live abroad. If you are single or file separately from your spouse, you must submit a Form 8938 if you have more than $200,000 of specified foreign financial assets at the end of the year and you live abroad; or more than $50,000, if you live in the United States, If you file jointly with your spouse, these thresholds double.

Who Needs to File FBAR?

Exceptions to the reporting requirement that include:

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.
At the time of filing the required income tax return, the taxpayer was not aware that he or she had a beneficial interest in a foreign trust or a foreign estate.

With some exceptions, if specified foreign financial assets were reported on other forms then they are not required to be reported a second time on Form 8938. These include any of the following:

Transactions with foreign trusts and foreign gifts reported on Form 3520 or Form 3520-A (filed by the trust). Form 3520 A instructions.
Activity of a Controlled Foreign Corporation reported on Form 5471
Transactions with Passive Foreign Investment Companies (PFIC) reported on Form 8621. With some exceptions, a PFIC is generally a foreign investment / hedge fund.
Activity of a Foreign Controlled Partnership(s) reported on Form 8865
Transactions with a Registered Canadian retirement savings plans reported on Form 8891

Form 8938 Penalty

Non-compliance or late filing of Form 8938 is subject to a penalty of $10,000 and an additional penalty of up to $50,000 for continued failure to file after IRS notification, and a 40 percent penalty on the amount of any understated tax attributable to non-disclosed of foreign financial assets.

The statute of limitations is extended up to six years after the filing of an income tax return . There is no statute of limitations if the FACTA Form 8938 is not filed.

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. It should be noted that the IRS will not accept as reasonable cause that the tax professional who prepared the U.S. income tax return for the person had no knowledge or a lack of understanding of the U.S. tax law if such professional is not a U.S. professional. For example, if it is claimed as reasonable cause that a Canadian tax professional or tax professional from the United Kingdom who prepared a U.S. income tax return was not aware or knowledgeable of the U.S. international tax rules, such reasonable cause is generally not accepted by the IRS.

Please consult your tax advisers. IWTA is more than happy to assist you with any international tax planning and compliance.

The Four Questions: Q2: Why does the U.S. employ a system of worldwide taxation?

by Jack Brister | Nov 19, 2019 | 2019, FAQ, Taxes, U.S., U.S. Economic System

The Four Questions: Q2: Why does the U.S. employ a system of worldwide taxation?

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

A Citizenship-Based Income Tax

The United States (U.S.) system of federal income taxation is a citizenship-based income tax. Elsewhere in the world, the basic rule is that taxes are based on residency and not on taxation of worldwide income based on citizenship.

The origin of the U.S. taxation of worldwide income is the first federal U.S. income tax. Enacted in 1861 in the early months of the American Civil War, it was part of the Revenue Act of 1861. It levied a 3% tax on incomes over $800, but a 5% tax on income earned in the U.S. by, “any citizen of the United States residing abroad”.

The purpose was to prevent the U.S. wealthy from evading their tax obligations (military and civic) as American citizens and retaining the privileges of citizenship by fleeing the U.S. in its time of crisis. In 1864, the tax was expanded to include income from all sources, no matter where generated (i.e., worldwide taxation). Scholars have said this was born from the proud sense of being a citizen of the U.S. With all the opportunities and privileges come obligations. The concept first flowered out of the battlefields of the U.S. civil war. Hence, the defense of citizenship-based taxation and taxation of worldwide income rests on the belief that U.S. citizenship confers benefits independently of where a citizen resides.

It is not necessary that the amount of benefit received be reflected precisely in the amount of tax charged because the system of U.S. taxation is based on taxes benefiting society at large. Therefore, the income tax liability is measured by the ability to pay, not by the amount of services used during the tax year. But benefit is an important consideration in the scope of an income tax. Many overseas taxpayers feel that taxing the income of citizens living abroad is justifiable only if significant benefits and privileges are afforded U.S. citizens wherever they live. The primary privilege is the ability to have a voice: “taxation with representation.” The early U.S. colonists did not have representation with the King of England. This issue was the primary cause of the U.S. revolutionary war.

The model of citizenship-based taxation of worldwide income has remained in the U.S. law ever since, even as the rest of the world has gravitated to a different model known as territorial taxation. Territorial taxation simply considers where the taxpayer is residing. Over the years, there have been no serious attempts by U.S. lawmakers to end the taxation of citizens who do not reside in the U.S. Instead, the focus of the debate has generally been on the extent to which the earnings of Americans working overseas should be taxed – by both the country of work/residency and the United States.

In addition, some U.S. economists have suggested that the current system of U.S. income taxation was visionary in the sense that the U.S. Federal Government at the time considered the implications of Imperialism. It has been discussed that shortly after the enactment of the current system in 1913, (allowed by the passage of the 16th Amendment to the U.S. Constitution which no longer required apportionment among the states under the 14th Amendment of the Constitution), Congress also enacted the foreign tax credit and other measures to make it easy for U.S. persons to know what their worldwide tax obligation would be and encourage overseas investment. The intention being to spread the American way of capitalism.

So, the thought of the U.S. system of worldwide federal income taxation appears to be rooted in the privilege of citizenship regardless of residence and Imperialism.

See our page on Pre-Immigration and Expatriation Planning for more information on tax liabilities for U.S. citizens living abroad or foreign nationals choosing to reside in the U.S.A.

The Four Questions Q1: What causes Americans to never give up even when the market crashes?

by Jack Brister | Nov 19, 2019 | 2019, Taxes, U.S.

The Four Questions Q1: What causes Americans to never give up even when the market crashes?

Jack Brister

Founder, International Wealth Tax Advisors

Jack Brister, Founder of International Wealth Tax Advisors, is a noted international tax expert, with over 25 years of experience. Jack specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures. Jack is a frequent featured speaker at numerous international financial conferences and has been named a Citywealth Top 100 U.S. Wealth Advisor.

Contact IWTA

To schedule an introductory phone conference with IWTA founder Jack Brister simply click here. Email IWTA at bloginquiries@iwtas.com Or call the IWTA New York City office at 212-256-1142

As a whole, Americans are risk takers.

From the early days of the United States (U.S.) colonies the settlers came from various places within Europe. And they came for various reasons: to increase wealth, broaden influence over world affairs, freedom of religion, and hope for a better life. They came with very little and risked everything for the chance of prosperity. The trip was long and hard and there was no turning back. Hence, the early colonists were risk takers and, that culture was the catalyst for the American Revolution.

I recall reading something in George Washington’s (the Commanding General of the Continental Army and first U.S. President) memoirs that said something to the affect that when accepting the commanding role of the Continental Army from the Continental Congress (speaking to the Congress), “You understand that the likelihood of us winning this war with a bunch of militia (mostly farmers) is unlikely, and when we lose, the King will cut our heads off and stake them at the gates for everyone to see so they understand never again to defy the King”. As you can see Americans have been taking risk for as long as the U.S. has existed, and that mindset continues today.

Everything about the U.S. encourages risk.

The bankruptcy laws allow a fresh start almost as many times as one can think. The U.S. tax rules encourage risk by providing for tax breaks by allowing losses to reduce a person’s tax liability. Children are taught at an early age to not fear failure, and if you want something you have to work hard and go after it. We Americans have a saying, “You are only a failure if you don’t try”. There was once an article in a New York business publication that had statistics reflecting that most successful business people failed seven times before finding success. Some of the most famous Americans contribute their failures to their success: Michael Jordan, Robert De Niro, and many others. They will tell you their failures taught them what not to do and what to do the next time.

The U.S. financial system also encourages risk. The greater the risk the greater the reward. Hence, the U.S. is a culture of risk. But that does not stop Americans from looking at what failed, and from those failures what did not work and what did work. This attitude of learning from mistakes and them moving forward is what helps the U.S. economy get back on track after a market crash and recover quickly from a bad economy. Americans never give up. They brush off the dust of failure and move forward looking for the next opportunity and how to exploit it. It’s called capitalism.

Capitalism is the American Way

Capitalism is what provides freedom, prosperity and hope for a better life. Capitalism has been the American way and culture from its earliest beginnings.