What is FATCA?

Under the Foreign Account Tax Compliance Act (FATCA), citizens of the United States who reside domestically or internationally must disclose their balances held in foreign accounts. The principal aim of the Foreign Account Tax Compliance Act (FATCA) is to address and mitigate instances of tax evasion.

The HIRE Act of 2010 enhanced international financial services transparency using the Foreign Account Tax Compliance Act (FATCA). Form 8938 serves as a means to disclose information on holdings in overseas accounts, and the failure to declare such holdings entails significant repercussions.

Understanding FATCA

President Obama signed FATCA into law in 2010 as part of the HIRE Act. Recruit is aimed at encouraging companies to recruit jobless people. The 2008 financial crisis led to a significant increase in unemployment rates.1

The HIRE Act provided companies with an increased tax credit for each new employee hired and kept for at least 52 weeks. Other incentives were payroll tax holiday benefits and a 2010 rise in the cost deduction limit for new equipment purchases.

FATCA Wants to Stop Tax Evasion

FATCA aims to prevent tax avoidance by American individuals and corporations receiving money overseas.

Maintaining an offshore account is permissible, but not disclosing it to the IRS is criminal, as the U.S. taxes all income and assets globally.

FATCA was partly developed to support HIRE business incentives and requires U.S. taxpayers to declare and pay annual taxes on foreign financial holdings. FATCA income pays for HIRE Act recruiting incentives.

U.S. residents who fail to register overseas accounts and financial assets above $50,000 a year face penalties.

Who Must Comply With FATCA?

Any taxpayer in the United States must fill out Form 8938 with more than $50,000 in financial holdings. These assets can take the form of bank accounts, equities, bonds, or other financial instruments of a similar nature.

Several things are not included. One prominent exemption applies to assets held by a foreign institution with a branch in the United States.

Expat Institutions

This legislation requires FFIs and NFFEs to disclose U.S. citizens’ account I.D.s and asset values to the IRS or FATCA Intergovernmental Agreement.

The IRS requires FFIs to comply or face exclusion from the U.S. market and a 30% tax penalty on any withheld payments. Banks may be required to withhold revenue from U.S. financial assets, including interest, dividends, and profits.

FFIs and NFFEs adhering to the legislation must record the name, address, TIN, account number, balance, and deposits and withdrawals of every U.S. citizen account holder annually.

Foreign Individual Taxpayers

The IRS requires Form 8938 for taxpayers living abroad in the following situations:

• “You are married, filing a joint income tax return, and your specified overseas financial assets amount to more than $400,000 on the final day of the tax year or $600,000 at any point. The thresholds apply even if only one spouse lives overseas. Joint income tax filers complete a single Form 8938 to disclose any specified overseas financial assets in which either spouse has an interest.
• “You are not a married person filing a joint income tax return, and the total value of your specified foreign 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.”

Foreign asset reporting thresholds depend on whether you live overseas and submit a joint income tax return. According to the IRS:

If you have more than $200,000 in specified foreign financial assets at the end of the year and live abroad or $50,000 in the U.S., you must file Form 8938 if you are single or file separately from your spouse. These criteria double for married filers. If you are a U.S. citizen whose tax residence is overseas and have been there for at least 330 days in 12 months, you live abroad.”

Individual U.S. taxpayers

Form 8938 is required by the IRS for U.S. taxpayers who:

• “You are unmarried, and your specified foreign financial assets amount to more than $50,000 on the last day of the tax year or $75,000 at any point.
• “You are married, filing a joint income tax return, and your specified overseas financial assets amount to more than $100,000 on the final day of the tax year or $150,000 at any point.
• “You are married, filing separate income tax returns, and your specified foreign financial assets amount to more than $50,000 on the final day of the tax year or $75,000 at any point. Include half the value of any specified foreign financial asset jointly owned with your spouse when computing your specified foreign financial assets for this threshold. If you must submit Form 8938, report the full value.”

FATCA: Who is a U.S. person?

FATCA standards use “United States person” (USP). Any of these are USPs:

• U.S. citizen or inhabitant
• US-based domestic partnership
• Domestic (US-incorporated) corporation
• Any estate, except foreign
• Any trust where a U.S. court has primary supervision over its administration and one or more U.S. people can control all significant trust decisions.
• The U.S. government, a state, or D.C. (including any agency, instrumentality, or political subdivision)
• Based on time spent in the U.S., the significant presence test might make a client a tax resident. The person must take the test every year in the U.S.
• Non-resident foreigners exclude students (F1, OPT, J1, and Q visas) from the significant presence rule for five years.
• The significant presence test excludes teachers and researchers (J1, Q Visas) from being considered non-resident immigrants for two years.
• Other H1B, L1, and other visa holders must meet the substantial presence test by being physically present in the U.S. for at least 31 days in the current year and 183 days in the three-year period that includes the current year and the two years immediately before that, counting (i) all the days in the current year and (ii) 1/3 of the days in the year before.
• F and J student visa holders must omit five calendar years for the significant presence criteria.
• Non-student visa holders must exclude two years.

Non-Compliance Penalties

I am not submitting Form 8938, which results in a penalty. The IRS can charge $10,000 for failing to file, $50,000 for failure to file after notification, and 40% for understating taxes on non-disclosed assets.

The organization can extend the statute of limitations to six years after filing its return for undeclared foreign financial asset income above $5,000. Failure to propose or disclose an investment on Form 8938 increases the tax-year statute of limitations to three years.

A reasonable basis for the failure extends the statute of limitations only to the loss-related goods, not the tax return.

Although this is case-by-case, no penalty is applied if the omission to disclose is justified.

Cost of Compliance

While non-compliance with FATCA is costly, international financial firms also face substantial compliance expenses. In 2021, deVere Group CEO and Campaign to Repeal FATCA co-founder Nigel Green estimated that FATCA’s reporting requirements affected 250,000 international financial organizations.

A Spanish bank estimated compliance costs at $8.5 million for a local branch and $850 million for a worldwide financial institution. Cost estimates for U.K. banking institutions ranged from $1.1 billion to $1.9 billion.

FATCA criticism

Critics of new tax legislation are inevitable. The Reuters news agency said that banks and businesspeople called FATCA “imperialist.” Financial firms oppose reporting on U.S. clients or withholding 30% of individual and investment payments to transmit to the IRS.

Zurich-based Swiss-American Chamber of Commerce tax attorneys called FATCA “the neutron bomb of the global economic system” and predicted it would inhibit foreign investment in U.S. markets.

Some critics say FATCA’s high cost may force international financial firms to sell their U.S. holdings.

Foreign banks opposed FATCA because it burdened their operations.

The Expat View

The American Citizens Abroad said that Americans living abroad must have assets and bank accounts in their nation. Because Americans living in the U.S. do not have to register their assets for tax purposes, Form 8938 discriminates against Americans living abroad. Only their income must be declared, as federal taxes only apply to income and capital gains.

American Citizens Abroad believed FATCA could result in the loss of trillions of dollars in investment, hindering American companies and financial institutions’ global competitiveness and Americans’ ability to live and thrive abroad.

The Difference Between FATCA and FBAR

Although identical, FBAR and FATCA reporting requirements differ significantly. Some assets must be mentioned on both forms, while others should be stated on one.

The IRS requires expatriates and those with overseas bank accounts to file the FBAR. Trusts, estates, and domestic businesses having foreign financial account holdings must submit FBARs.

Citizens, residents, and non-resident aliens must comply with FATCA.

Residents and entities in U.S. territories must file FBARs but not FATCA forms.

FATCA requires individuals to disclose foreign securities, partnership interests, hedge funds, and private equity firms. U.S. banks require FBARs for assets in overseas branches, signatory accounts, and indirect ownership or beneficial interests.

Does FATCA only apply to Americans?

FATCA affects all U.S. taxpayers with foreign holdings. That covers citizens, green card holders, U.S.-owned firms, and anybody who spends a specific number of days in the U.S. and has foreign accounts. FATCA impacts all banks worldwide that hold U.S. taxpayer assets.

How do I avoid FATCA?

You cannot evade FATCA if you are an American taxpayer with overseas financial institution holdings, and avoiding it has severe penalties.

Bottom Line

U.S. citizens residing at home or abroad must declare their overseas account balances annually under FATCA. Complete and mail Form 8938 to file. Different filing and holding thresholds apply to U.S. and foreign residents. Do you need to file if you have assets abroad? There are steep fines for not doing so.

Conclusion

• U.S. citizens must declare foreign accounts and pay taxes under FATCA to avoid tax evasion.
• FATCA taxes finance 2010 HIRE Act business incentives.
• I am not disclosing foreign account assets on Form 8938, which bears significant fines.
• Americans who fail to register offshore account balances exceeding $50,000 face steep fines.
• FATCA critics believe it disproportionately affects international banks and financial enterprises that report customer assets.