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