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Everything you need to know about Foreign Accounts Tax Compliance Act

The Foreign Account Tax Compliance Act, which is abbreviated as FATCA, is simply a law that requires the United States citizens who are either living at home or abroad to file their annual reports on foreign accounts they have. There are several requirements for compliance and enhanced reporting under Foreign Accounts Tax Compliance Act.

The United States citizens have to comply with the FATCA rules. While they are still developing the FATCA rules, it’s still crucial to understand the FATCA mechanics and applications to help you understand what you need to do to bring your accounts payable and personal finances into compliance. This post discusses everything you need to know about Foreign Accounts Tax Compliance Act. 

Understanding Foreign Accounts Tax Compliance Act

Foreign Accounts Tax Compliance Act sets reporting requirements for the United States taxpayers and foreign financial institutions who have some foreign assets. Ideally, if your foreign financial organization operates in another country and has a working relationship with the United States, you can be asked to declare whether or not you are a citizen of the United States for tax purposes. If you are, then the financial institution can require you to report to the IRS your account information. On the other hand, if you falsely say that you are not a citizen of the United States of America, then the IRS can prosecute you for tax fraud. 

The requirement for a foreign financial institution to report this account information for the United States taxpayers has made it easier for the IRS and the government to track tax evasions for people who attempt to hide their cash in foreign bank accounts. Besides, a taxpayer needs to file their foreign account report, which you can do on Form 8938.

Remember that you can file Form 8938 with your tax return. This filing requirement happens to be an addition to the Foreign Bank Account Report filing requirements. But the criteria and threshold for filing the Foreign Bank Account Report and Form 8938 are different.

In most cases, an  Foreign Bank Account Report filing requirement can happen if your account balance is more than $10,000 at any point during the year, while Form 8938 tends to have a different threshold that depends on your tax filing status. It also depends on whether you live in the United States or abroad. Even for individual taxpayers who reside in the United States, Form 8938 can be required if the value of certain foreign assets are more than $50,000 on the final day of the tax year, or exceeds $75,000 at any time during the year. 

Unfortunately, it can be tricky to define specified foreign financial assets, so it makes sense to reveal all the foreign assets you have to the person who prepares your tax so that they check whether or not it requires it to be listed. 

Since there are various thresholds, you may need to file an Foreign Bank Account Report and not Form 8938. Sometimes, you need to file both. It’s worth noting that failing to file Form 8938 can attract a certain penalty. They can also waive this penalty if you prove that there was a reasonable cause that forced you not to file. 

You can also use the offshore disclosure methods like Offshore Voluntary Disclosure Program as well as the Streamlined Filing Compliance Procedures to comply with FATCA. Therefore, you need to speak with your tax attorney to find out whether you have  Foreign Bank Account Report or FATCA violations you need to disclose. Also, you have to determine the number of years of non-compliance you should disclose. You also need to know if the failure to report your foreign assets can be considered by the IRS to be willful or non-willful. 

That said, the Foreign Bank Account Report which is abbreviated as FBAR and FATCA have similar reporting requirements, though there are some significant differences. You need to disclose some of your assets on one form and not the other, while others have to be disclosed on both.

You should remember that the  Foreign Bank Account Report is simply a form that expatriates and other United States citizens are required to file. Foreign Bank Account Reports can also be filed on behalf of estates, trusts, and domestic entities that have their assets in foreign financial accounts.  

Also, FATCA can apply to residents, non-resident aliens, and individual citizens. Entities and residents in the United States territories have to file Foreign Bank Account Reports, but they don’t have to file FATCA forms.

Foreign stocks and securities, hedge funds, partnership interests, and many more need to be disclosed under FATCA.  Foreign Bank Account Reports are needed for assets that are held in foreign financial branches of the United States banks, meaning you need to have signatory authority as well as beneficial interests or indirect ownership interests. 

What you need to report under FATCA 

FATCA is there to get rid of tax evasion by American businesses and individuals that invest, operate, and earn taxable income overseas. You should note that you can have an offshore account, but it’s illegal to fail to disclose your account to the IRS because the United States taxes all assets and income of its citizens globally.

The truth is that the FATCA was created to fund the expenses of the business incentives that are provided in HIRE. Therefore, the provisions in the FATCA require all the taxpayers to report their financial assets and income they keep overseas annually and pay taxes that are due on them. As a result, there is a revenue stream that is generated by FATCA and goes toward the costs required for the hiring incentives provided in the HIRE Act.

As explained earlier, you need to file a FATCA once you have financial assets that are at least $50,000 or more. You can have these assets in your bank account or can be in bonds, stocks, and other financial instruments. But there are also some exceptions. One of these exceptions is for assets that you hold in the United States branch of a foreign bank or a foreign branch of the United States bank.

Foreign financial institutions as well as non-financial foreign entities need to comply with these laws by disclosing the identities of the United States citizens who have accounts and assets in these accounts to the IRS.

Failure for foreign financial institutions to make these reports to the IRS can be excluded from the United States market. They can also face a tax penalty that is 30 percent of the value of assets they hold. It’s worth mentioning that a withholdable payment can include the funds made from the United States financial assets an institution holds, such as dividends, interest, and periodic profits. 

non-financial foreign entities and foreign financial institutions that agree to this law need to report every year the address, name, and tax identification number of the account holders who are United States citizens. Also, they have to report the account balance, account number, and any deposits or withdrawals on the account.  

Reporting thresholds

The reporting thresholds when it comes to foreign assets tend to vary depending on whether you live abroad or intend to file joint income tax returns.  The IRS requires taxpayers living abroad to fill Form 8938. You qualify to do this if you are married and want to file a joint income tax return. In such cases, the total value of the foreign assets need to exceed $400,000 and this should be on the last date of the tax year. 

You can also file it if you have funds that exceed $600,000 at any point during the year. Remember that these thresholds can be eligible even if you don’t have a spouse living with you abroad. For the married people, they can file one Form 8938 to report the specific foreign financial assets. 

If you are not married and want to file a joint income tax return, then the total foreign assets need to exceed $200,000 on the tax year’s last day or should exceed $300,000 at any point during the year. 

The IRS also requires the taxpayers who live in the United States to file Form 8938. In such cases, you need to be married and have specified foreign financial assets that exceed $50,000 on the tax year’s last day or you should have over $75,000 at any stage during the year.

You can also be married and file a joint income tax return. The total value of the specified foreign financial assets needs to exceed $100,000 on the tax year’s last day or the value should exceed $150,000 at any point during the tax year.

You can also be married and file a separate income tax return. In this case, the total amount of the specified foreign financial assets has to exceed $50,000 on the tax year’s last day or exceed $75,000 at any stage during the financial year. It’s worth noting that these thresholds can be adjusted, so it’s a good idea to consult your attorney to make sure that you get the right legal advice.

Richard Maxwell

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