The Foreign Account Tax Compliance Act was enacted by the Congress in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act to combat tax evasion by US persons holding investments in offshore accounts. The United States Treasury Department and the IRS continue to develop guidance concerning FATCA. The Act generally requires foreign financial institutions to report certain information about certain financial accounts held by U.S taxpayers or by foreign entities in which U.S taxpayers hold a substantial ownership interest and pay the taxes they owe.
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. Foreign partnership interests and mutual funds. Some less commonly reported are ones such as, investment assets held by foreign or domestic grantor trusts for which you are the grantor. Foreign issued life insurance or annuity contracts with a cash value. Foreign hedge funds and foreign private equity funds.
U.S. Persons and Non-resident Aliens
U.S law treats U.S persons and foreign persons differently for tax purposes. U.S national refers to an individual born in the United States, Puerto Rico, Guam, U.S Virgin Islands. Individuals who were born in American Samoa or were born in the Commonwealth of the Northern Mariana Islands who have elected to be treated as U.S nationals. The Child Citizenship Act, applied to both adopted and biological children of U.S citizens which provide for the automatic acquisition of U.S citizenship after meeting certain conditions. An alien is any individual who is not a U.S citizen or U.S national, you are considered a nonresident alien unless you meet one of two tests. You are a resident alien of the United States for tax purposes if you meet either the green card test or the substantial presence test for the calendar year (January 1-December 31). You are a resident, for U.S 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 for tax purpose test, you must be physically present in the United States (U.S) on 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 years immediately before that.
Under FATCA, U.S taxpayers holding financial assets outside the United States must report those assets to the IRS. It’s in addition to the long-standing requirement to report with tax return known as FinCEN Form 114 Report of Foreign Bank and Financial Accounts known as FBAR. FATCA require foreign financial institutions to report directly to the IRS information about financial accounts held by U.S taxpayers or by foreign entities wherein U.S taxpayers hold a substantial ownership interest. The reporting institutions not only include banks, but other financial institutions such as investment entities, brokers, and certain insurance companies. Some non-financial foreign entities also must report of their U.S. owners. We can see that’s the reason when one tries to set up a new account with a foreign financial institution, they ask information about citizenship.
FATCA requires U.S taxpayers who hold foreign financial assets with aggregate value of more than the reporting threshold (at least $50,000) to report information about those assets on Form 8938 along with tax returns. Reporting thresholds vary based on whether you file a joint income tax return or live abroad.
US Citizen whose tax home is in a foreign country and has been present in a foreign country or countries for at least 330 days out of a consecutive 12-month period is considered to live abroad.
If you are single or file separately from your spouse and living abroad, you must submit Form 8938 if the total value of financial assets is more than $200,000 on the last day of the tax year or more than $300,000 any time during the year. When you are filing married joint tax return and living abroad, one should 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 the year. These thresholds apply even if only one spouse resides abroad.
Foreign Financial Assets
Foreign financial assets include foreign financial accounts and foreign non-account assets held for investment (as opposed to held for use in a trade or business), such as foreign stock and securities, foreign financial instruments, contracts with non-US persons and interests in foreign entities. These are to be reported.
Foreign currency is not a specified foreign financial asset. Foreign real estate is not a specified foreign financial asset if used as a personal residence or a rental property. If the real estate is held through a foreign entity, then the interest in the entity is to be reported if the total value of all specified foreign financial assets is greater than the reporting threshold that applied. Directly held tangible assets, such as art, antiques, jewelry, cars and other collectibles, are not specified foreign financial assets. Directly held precious metals, such as gold, are not specified foreign financial assets. However, gold certificates issued by a foreign person may be foreign financial asset and need to be reported based upon reporting threshold.
You don’t have to report an asset if a financial account is maintained by a US payer. A US payer 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, financial accounts with such entities do not have to be reported. You don’t have to report assets if the person having beneficial interest in a foreign trust or a foreign estate, don’t know or have reason to know of the interest. If you receive a distribution from a foreign trust or foreign estate, you have the knowledge of your interest in the trust or estate. You don’t have to report if you have interest in a social security, social insurance, or other similar program of a foreign government, as these are not considered specified foreign financial assets. If specified foreign financial assets has been reported on other Forms, then you don’t have to report them a second time on Form 8938.
Normally a reasonable estimate of the highest fair market value of the asset during the tax year is reported and one needs to determine the value of specified foreign financial assets to know whether the value exceeds the threshold applicable based on the filing status etc. To determine fair market value of a specified foreign financial asset a reasonable estimate is sufficient based upon the publicly available information from reliable financial sources or other verifiable sources. For foreign assets the value is denominated in foreign currency. One has to use the US Department of Treasury’s Bureau of Fiscal Service’s 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 tax year.
Effect of Non-Compliance
Penalty for non-compliance is huge. If one has to file Form 8938 but does not file it, then IRS imposes $10,000 failure to file penalty, an additional penalty of up to $50,000 for continued failure to file after IRS notification, and a 40 percent penalty on an understatement of tax attributable to non-disclosed assets. If one fails to file or properly report an asset on Form 8938, statute of limitations is extended by three years following the time one provides the required information. If one omits from gross income more than $5,000 attributable to specified foreign financial assets, the statute of limitations is extended to six years after you file your return. Exceptions apply if the failure is due to reasonable cause, then the statute of limitations is extended only regarding the item or items related to such failure and not for the entire tax return. If the failure to disclose is due to reasonable cause and not due to willful neglect, no penalty will be imposed. Reasonable cause is determined on a case-by-case basis, based on facts and circumstances.
If you need any further information on the FATCA, please do not hesitate to contact us US Tax Consultants at +34 915 194 392