Digging Into FATCA and Form 8938 for U.S. Expats
Oct 02, 2017
In this post, the FBAR Wiz will explore the details of the Foreign Tax Account Compliance Act ("FATCA") as well as the Form 8938, specifically as they apply to American expats. In recent years, the IRS and United States Treasury have ramped up their efforts at tracking down delinquent taxpayers and enforcing payment of past due taxes. One of these initiatives has been labeled the “Foreign Account Tax Compliance Act." FATCA is part of the Hiring Incentives to Restore Employment ("HIRE") Act, which was designed to enforce higher tax compliance among U.S. taxpayers with foreign accounts and assets. FATCA created Form 8938, an additional foreign account reporting requirement over and above the Report of Foreign Bank and Financial Accounts ("FBAR") that needs to be filed with the U.S. Treasury every year. If a taxpayer has more than a certain amount of foreign assets, Form 8938 is included as part of their annual 1040 filing and requires reporting an expanded list of foreign assets not covered by FBAR. Exploring FATCA's Impact on U.S. Expats The purpose of the FATCA is to force managers of foreign financial institutions to report all American clients to the IRS or be severely penalized with high withholding taxes. If the information reported is not 100% accurate and complete, the fund manager will still be faced with a penalty. This rule, however, is not without complications:
- Some countries have data protection laws in place that would be if the manager cooperates with the IRS.
- A fund manager may not realize that he has an American client because the client is represented by a non-American.
- The client may not provide the manager with the required information.
The penalty is solely applied to the manager, not the American client, regardless of the manager’s nationality. As you see, a non-cooperative American expat client may be more trouble than he is worth. Who Must File FATCA? For United States citizens living and/or working abroad: for U.S. citizens who are considered by the IRS to be foreign residents for the entire tax year or who meet the physical presence test for living in a foreign county, the new limits are: Single: Aggregate foreign assets of USD 200,000 on the last day of the year or USD 300,000 at any time during the year. Married Filing Jointly: Aggregate foreign assets of USD 400,000 on the last day of the year or USD 600,000 at any time during the year. Foreign Fund Manager Compliance You may wonder why a foreign fund manager would cooperate with the IRS even though they (presumably most) do not have any ties to the United States government. The answer is simple: the potential penalty. Fund managers normally feel obligated to register with FATCA because the American bond and equity markets are the largest in the world. “The law requires that foreign financial institutions (a category that seems to include everybody from financial advisers to pension funds) register with the Internal Revenue Service by June 30th 2013. If they do not register, they will then be regarded as “non-participating”. In that case a 30% withholding tax will be applied to all their income on American assets from 2014 as well as to the proceeds from the sales of these assets from 2015.” Important Considerations
- Form 8938 is due at the time of your normal tax filing including extensions.
- Filing Form 8938 does not exempt you from the requirement to file FBAR.
- If you are not required to file a tax return, you do not need to file Form 8938.
- If you are required to file a Form 8938 and you have a specified foreign financial asset reported onForm 3520, Form 3520-A, Form 5471, Form 8621, Form 8865, or Form 8891, you do not need to report the asset on Form 8938. On the Form 8938, however, you do have to identify which and how many of each of these forms you file.
- Even if a foreign financial asset is reported on one of the forms listed above, it still must be included it in your calculation of specified foreign financial assets.
- The penalty for failing to file Form 8938 is USD 10,000, with an additional penalty up to $50,000 for continued failure to file after IRS notification. A 40% penalty on any understatement of tax attributable to non-disclosed assets can also be imposed and special statute of limitation rules apply.
Form 8938 is separate from the FBAR form and its requirements. FBAR is filed with the US treasury while Form 8938 is filed with the IRS. However, if you are required to file Form 8938, your assets will most likely fall under the FBAR filing requirements (f the majority of your assets are financial) accounts. Potential Penalties Each applicable penalty is levied on a case by case basis, however, and those who are ignorant are usually not penalized as harshly as those who have intended to (or appear to have intended to) defraud the government. The penalty that may be incurred for failing to file Form 8938 is a severe $10,000 with an additional $50,000 for those who ignore the IRS’s initial warning. Additionally, the IRS may apply a 40% penalty on the taxes from non-disclosed assets. Unlike many expat tax matters, the filing requirements leave little guess work. Everything is clearly detailed in the section “Form 8938 instructions” on the IRS website. These details include relevant dates, asset types, account types and thresholds. Failure to comply or fully understand the Form 8938 requirements is a costly mistake - both in regards to time and money. The IRS continues to roll out new ways to identify Americans holding financial and investment accounts abroad. These disclosure reporting requirements all come loaded with the highest IRS penalties, starting at $10,000 per non-filing or incorrect filing incident. To detect if you have an obligation to report foreign accounts and/or foreign assets, check out the free FBAR Wiz app. Also, be sure to check out this related blog post exploring helpful tips for U.S. Expats who own foreign businesses.