The Foreign Account Tax Compliance Act was enacted by Congress in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act to combat tax evasion by US persons who have investments in offshore accounts. The United States Department of the Treasury and the IRS continue to develop guidance regarding FATCA. The Act generally requires foreign financial institutions to report certain information about certain financial accounts maintained by US taxpayers or by foreign entities in which US taxpayers have a substantial interest and pay the taxes owed.
FATCA generally requires the reporting of foreign financial assets, including some common ones, such as financial accounts held at foreign financial institutions. Foreign stocks or securities not held in a financial account. Interests from foreign companies and mutual funds. Some that are less frequently reported are investment assets held by domestic or foreign grantor trusts for which you are the grantor. Foreign issued life insurance or cash value annuity contracts. Foreign hedge funds and foreign private equity funds.
US law treats US persons and foreign persons differently for tax purposes. US National means a person born in the United States, Puerto Rico, Guam, US Virgin Islands. An individual born in American Samoa or the Commonwealth of the Northern Mariana Islands who has chosen to be treated as a United States citizen. The Child Citizenship Act, which applies to both adopted and biological children of US citizens, provides for the automatic acquisition of US citizenship after meeting certain conditions. An alien is anyone who is not a US citizen or national. You are considered a nonresident alien unless you meet one of the two tests. You are a resident alien of the United States for tax purposes if you meet the green card test or the substantial presence test for the calendar year (January 1 through December 31). You are a resident, for US federal tax purposes, if you are a lawful permanent resident of the United States at any time during the calendar year. This is known as the “green card” test. To meet the United States resident test for tax purposes, you must be physically present in the United States (US) for at least:
1) 31 days during the current year and
2) 183 days during the 3-year period that includes the current year and the two immediately preceding years.
Under FATCA, US taxpayers who own financial assets outside of the United States must report those assets to the IRS. It adds to the longstanding requirement to report with the tax return known as FinCEN Form 114 Foreign Bank and Financial Accounts Report known as FBAR. FATCA requires foreign financial institutions to report directly to the IRS the financial accounts of US taxpayers or of foreign entities in which US taxpayers have a substantial ownership interest. Reporting institutions not only include banks, but also other financial institutions such as investment firms, brokers, and certain insurance companies. Some foreign nonfinancial entities are also required to report their US owners. We can see that this is why when one tries to set up a new account with a foreign financial institution, they ask for citizenship information.
FATCA requires US taxpayers who own foreign financial assets with added value above the reporting threshold (at least $50,000) to report information about those assets on form 8938 along with tax returns. The filing thresholds vary depending on whether you file a joint income tax return or live abroad. If you are single or filing separately from your spouse, you must file Form 8938 if you have more than $200,000 in 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 . A US citizen whose tax residence is in a foreign country and who has been present in a foreign country or countries for at least 330 days out of a consecutive 12-month period is considered to be living abroad. When you file a joint married-living-foreign tax return, you must file Form 8938 when the total value of 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 year. These thresholds apply even if only one of the spouses resides abroad. If you are not married, the total value of 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.
One must file Form 8938 if filing as single and the total value of foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. If filing as married filing jointly, then the total value of foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year. If you are filing married filing separately, then the total value of foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. In calculating the value of foreign financial assets, limit, include half the value of any specific foreign financial asset owned jointly by your spouse. But for reporting purposes, the full value must be reported on form 8938.
Foreign Financial Assets:
Foreign financial assets include foreign financial accounts and foreign non-account assets held for investment (other than those held for use in a trade or business), such as foreign stocks and securities, foreign financial instruments, contracts with non-U.S. persons, and interests in foreign entities. These must be reported.
Foreign currency is not a specific foreign financial asset. Foreign real property is not a specified foreign financial asset if it is used as a personal residence or rental property. If the real estate is held through a foreign entity, then the interest in the entity must be reported if the total value of all specified foreign financial assets is greater than the reporting threshold that was applied. Directly owned tangible assets, such as works of art, antiques, jewelry, automobiles, and other collectibles, are not specified as foreign financial assets. Directly owned precious metals, such as gold, are not specified foreign financial assets. However, gold certificates issued by a foreign person may be foreign financial assets and must be reported under the reporting threshold.
You do not have to report an asset if a US payor maintains a financial account. A US payor includes a US branch of a foreign financial institution, a foreign branch of a US financial institution, and certain foreign subsidiaries of US corporations. Therefore, it is not necessary to report financial accounts with such entities. You do not need to report assets if the person who has a beneficial interest in a foreign trust or foreign estate does not know or has no reason to know of the interest. If you receive a distribution from a foreign trust or foreign estate, you are aware of your interest in the trust or estate. You do not have to report whether you have an interest in a foreign government’s social security, social security, or other similar program, as these are not considered specific foreign financial assets. If specific foreign financial assets were reported on other forms, you do not need to report them a second time on form 8938.
A reasonable estimate of the highest fair market value of the asset during the fiscal year is normally reported and it is necessary to determine the value of specific foreign financial assets to know if the value exceeds the applicable threshold based on marital status, etc. To determine the fair market value of a specific foreign financial asset, a reasonable estimate based on publicly available information from reliable financial or other verifiable sources is sufficient. For foreign assets the value is denominated in foreign currency. One has to use the US Treasury Department’s Office of Fiscal Services’ foreign currency exchange rates to convert the denomination into US dollars. The exchange rate is based on the exchange rate on the last day of the fiscal year.
Effect of breach:
The penalty for non-compliance is huge. If one is required to file Form 8938 but does not file it, then the IRS imposes a $10,000 failure to file penalty, an additional penalty of up to $50,000 for failure to file after IRS notification, and a 40 percent penalty. cent for underestimating the tax attributable to undisclosed assets. If one fails to properly file or report an asset on Form 8938, the statute of limitations is extended three years after the time the required information is provided. If more than $5,000 attributable to specific foreign financial assets is omitted from gross income, the statute of limitations is extended to six years after you file your return. Exceptions apply if the breach is due to reasonable cause, then the statute of limitations extends only with respect to the item(s) related to such breach and not for the entire tax return. If the non-disclosure is due to reasonable cause and not willful negligence, no penalty will be imposed. Reasonable cause is determined on a case-by-case basis, based on the facts and circumstances.
The IRS has announced a new streamlined compliance procedure if you are a nonresident US taxpayer. Contact a tax professional to review your case to ensure FACTA compliance.