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Financial Accounts & Investing Abroad
There is no shortage of information about the Foreign Account Tax Compliance Act (FATCA); however, not all positive. FATCA brings about an emotional reaction from expats in particular. Many feel that they are unfairly singled out and labeled as tax evaders simply because they hold accounts and assets abroad. Regardless, it is essential to separate this reaction to FATCA from the facts.
The Foreign Account Tax Compliance Act (FATCA) was created as part of the HIRE Act of 2010 and was designed to uncover tax cheats hiding money and assets offshore. FATCA created new information reporting and withholding for payments made to certain foreign financial institutions and foreign entities. This program is designed to make it easier for the US government, specifically the IRS, to keep track of US persons and businesses earning income from investments/deposits in foreign bank accounts.
FATCA is not administered by the IRS; it is run by a different agency within the US Treasury Department—the Financial Crimes Enforcement Network, or FinCEN. While FinCEN is not a part of the IRS, they can and do share information at times.
Under FATCA filing requirements, all US citizens are required to report certain foreign assets to the IRS if they exceed certain thresholds (which are different for those residing in the US and those living abroad). In addition to individual reporting requirements, foreign financial institutions are required to report on the assets of their American clients in order to avoid a 30% withholding on certain payments from the US.
While the primary goal of FATCA is to force tax evaders to come forward, US expats are often caught in the crossfire. Of course, it makes sense that expats will have assets and accounts overseas as it is part of their daily life. With the extra reporting and private nature of the reporting, the Act has been called a violation of privacy.
However, the fact remains that FATCA is a requirement for all US citizens, including expats. So what do you need to know to remain compliant? Here are 5 tips to know when filing FATCA:
The Foreign Bank Account Report (FBAR) is similar to FATCA, as it is also designed to uncover tax evaders who use bank accounts abroad to hide money from Uncle Sam. FBAR reporting is different, as it pertains to foreign account balances of $10,000 or higher (even if accounts only held that balance for one minute!) If it applies, you must file FinCEN 114 electronically by October 15 of each year. FBAR is just about bank accounts—no other assets need to be reported.
On the other hand, FATCA is more comprehensive. While you must report your bank accounts and other foreign assets, the thresholds are much higher. You must file FATCA if your assets exceed the following values:
Single taxpayers living abroad:
$200,000 on the last day of the tax year or $300,000 at any point during the year.
Married taxpayers living abroad:
$400,000 on the last day of the tax year and $600,000 at any point during the year.
Single taxpayers living in the US:
$50,000 on the last day of the tax year or $75,000 at any point during the year.
Married taxpayers living in the US:
$100,000 on the last day of the tax year or $150,000 at any point during the year.
Reporting requirements for FBAR are straightforward, but for FATCA reporting, not so much! Specified foreign assets make it difficult to decipher exactly what assets are within that definition. The IRS defines the assets as:
With the increased information about the ‘invasive’ nature of FATCA, many Americans are considering the option of renouncing their citizenship. Giving up your US citizenship WILL relieve you of FATCA reporting requirements—but it’s not always that simple.
First off, the cost of renouncing is $2,350. That’s right—it will cost you $2,350 to hand over your passport. This price tag may simply be too much for some expats, and they will be ‘forced’ to continue filing US taxes as a citizen.
Secondly, there is a possibility that you would be considered a ‘covered expat’, which may mean you will be subject to an exit tax. (Read this article for more details on exit tax.)
It is important to know that if you intend to expatriate, you must prove 5 years’ worth of compliance with US expat taxes. So if you are not current on your US taxes, you will need to become compliant prior to filing for renunciation.
Overseas Americans may experience issues with foreign banks. FATCA reporting requirements for banks have become quite extensive, and many banks choose to avoid it altogether by simply refusing to work with American clients.
Regardless of whether US expats are well-established citizens or not, sometimes the reporting requirements are not worth the effort for banks. US citizens may find that they are unable to open accounts or have been dropped by their current bank (sometimes without notice), so it’s essential that Americans be prepared for this possibility and keep a bank account in the US just in case this occurs.
The IRS states that penalties for failing to file FATCA are “$10,000 per violation, plus an additional penalty of up to $50,000 for continued failure to file after IRS notification, and a 40% penalty on an understatement of tax attributable to non-disclosed assets.”
There are several options for becoming compliant if you were unaware of the reporting requirements. The most popular option for expats is to file under the Streamlined Filing Compliance Procedures. This IRS program allows innocent delinquent filers the opportunity to catch up without late filing penalties. There are no restrictions to filing under this program. All you have to do is self-certify that your lack of filing wasn’t willful or purposeful.
Expats hesitant to alert the IRS to their existence tend to lean towards doing ‘quiet disclosures’, which means you file back returns outside of an IRS amnesty program and try to ‘slide in under the radar.’ While this is an option, it is a risky one. If the IRS realizes you are trying to do a quiet disclosure and contacts you, you are now ineligible to participate in the amnesty programs, which opens you up to astronomical penalties.
Typically, Greenback advises US expats to file under the Streamlined Filing Compliance Procedures to minimize risks—there are no penalties, and by simply filing 3 years of taxes and 6 years of FBARs, you can become compliant.
We get it! Foreign financial reporting can feel confusing. But, if you know you need to file FATCA, the good news is that you don’t have to go it alone. We can help you file Form 8938 to meet your FATCA reporting requirements and avoid penalties for non-compliance. Contact us, and we’d be happy to help you.
Filing expat taxes doesn’t have to be a hassle. Start your filing process with Greenback today.