How the Foreign Account Tax Compliance Act (FATCA) Affects Expats

Last updated on November 19, 2024

The Foreign Account Tax Compliance Act (FATCA) is a U.S. law that aims to combat tax evasion by requiring U.S. citizens, including those living abroad, to report their foreign financial assets. FATCA also mandates foreign financial institutions (FFIs) to disclose information on accounts held by U.S. taxpayers. Enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, FATCA has significant implications for expats, from additional reporting obligations to potential banking challenges.

What is FATCA?

FATCA requires U.S. persons to report specified foreign financial assets if their total value exceeds specific thresholds. These reporting requirements apply even if the individual resides outside the United States. Simultaneously, FFIs must provide the IRS with details of U.S. clients’ accounts or face a 30% withholding tax on certain U.S.-sourced income. The intent is to uncover hidden wealth in offshore accounts, but compliance has proven complex for many taxpayers and financial institutions alike.

Impact on U.S. Expats

1. Reporting Requirements for Expats

U.S. expats must file Form 8938 (Statement of Specified Foreign Financial Assets) with their tax returns if their foreign assets exceed the following thresholds:

• Single filer or married filing separately, residing abroad:
  • More than $200,000 on the last day of the tax year, or
  • Over $300,000 at any point during the year.
• Married filing jointly, residing abroad:
  • Assets above $400,000 on the last day of the tax year, or
  • Exceeding $600,000 at any time during the year.

These thresholds are notably higher than those for U.S.-based taxpayers, reflecting the practicalities of living abroad.

2. Overlap with FBAR Reporting

Many expats confuse FATCA with the Foreign Bank Account Report (FBAR). While both require disclosing foreign accounts, FBAR has a lower reporting threshold of $10,000. FATCA focuses on income generated from foreign assets, reported through Form 8938, which is filed with your tax return. In contrast, FBAR (Form 114) is filed directly with the Treasury Department, serving as a monitoring tool under the Bank Secrecy Act.

3. Challenges with Foreign Banks

Many expats face difficulties opening or maintaining accounts abroad due to FATCA. Some foreign banks prefer not to deal with U.S. clients to avoid the burdensome reporting requirements and potential penalties. As a result, U.S. expats increasingly rely on larger international financial institutions that are FATCA-compliant, limiting their banking options and complicating local transactions.

4. Compliance Burdens and Penalties

FATCA compliance is critical, as non-compliance can result in severe penalties:

• Failure to file Form 8938: $10,000 per violation, increasing by $10,000 every 30 days up to a maximum of $50,000 if the failure continues.
• Additional penalties: A 40% fine on underreported income linked to undisclosed foreign assets and potential criminal charges in severe cases.

Many expats consult tax professionals who specialize in international taxation to manage the complexities. The IRS Streamlined Filing Compliance Procedures allow expats unaware of their filing obligations to catch up on delinquent returns without incurring penalties.

Examples of Reportable Foreign Financial Assets

Expats must report various foreign assets under FATCA, including:

• Foreign bank and custodial accounts
• Interests in foreign pensions, mutual funds, or insurance policies
• Holdings in foreign corporations, partnerships, or trusts
• Real estate held through a foreign entity (though the property itself isn’t reportable)

Direct ownership of real estate, art, or other personal items does not trigger FATCA reporting unless tied to a foreign financial entity.

Practical Steps for Expats to Stay Compliant

1. Evaluate Your Foreign Financial Assets: Ensure that your financial accounts and other relevant assets are accounted for under FATCA rules.
2. Consolidate Assets Where Possible: Keeping accounts with larger international banks that are FATCA-compliant can simplify compliance and reduce banking challenges.
3. File Timely and Accurately: Report all relevant financial assets using Form 8938 alongside your annual tax return. When in doubt, over-reporting is safer than under-reporting.
4. Use IRS Relief Programs If Needed: If you’ve missed filing requirements, consider the Streamlined Filing Compliance Procedures to avoid penalties.

Conclusion

FATCA has transformed how U.S. expats manage their finances abroad, adding compliance burdens and potential challenges with foreign banks. While FATCA aims to deter tax evasion, it also complicates the financial lives of law-abiding expats. Ensuring timely and accurate reporting can help expats avoid steep penalties and maintain good standing with the IRS. Working with a tax professional is often essential to navigate the complexities of FATCA and stay compliant.

Sources

• Greenback Expat Tax Services
• Bright! Tax Expat Tax Services
• Expat Tax Professionals
• Tax Samaritan
• Creative Planning