What Is FATCA?

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What Is FATCA?

What Is FATCA?

The Foreign Account Tax Compliance Act (FATCA) compels US persons residing in the United States or overseas to make yearly reports on any foreign account assets they have. FATCA’s primary purpose is to prevent tax evasion.

The FATCA was enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act in 2010, with the goal of increasing openness in the global financial services industry. Form 8938 is used to record any foreign account assets, and there are severe consequences for failing to do so.

Key Takeaways

  • With the objective of preventing tax evasion, the Overseas Account Tax Compliance Act (FATCA) compels US persons to make yearly reports on any foreign account holdings and pay any taxes owing on them.
  • The FATCA tax revenues pay for the business incentives included in the 2010 HIRE Act.
  • Form 8938 is used to record any foreign account assets, and there are severe consequences for failing to do so.
  • Residents of the United States who fail to register their overseas account holdings of more than $50,000 in any given year face severe fines.
  • FATCA opponents argue that it imposes an unfair burden on international banks and financial institutions that are required to report on their clients’ assets.

Understanding FATCA

President Barack Obama signed the Foreign Account Tax Compliance Act (FATCA) into law in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. Recruit was primarily intended to encourage companies to hire jobless employees. During the 2008 financial crisis, unemployment rates surged.

One of the HIRE Act’s incentives for companies was an increase in the company tax credit for each new employee recruited and kept for at least 52 weeks. Other advantages were payroll tax holidays and a raise in the expenditure deduction maximum for new equipment acquired in 2010.

The Goal of FATCA: Preventing Tax Evasion

FATCA aims to reduce tax avoidance by American people and corporations that invest, operate, and generate taxable income in other countries.

While maintaining an offshore account is not unlawful, failing to report the account to the Internal Revenue Service (IRS) is, since the United States taxes all income and assets of its people on a worldwide basis.

In fact, the FATCA was formed in part to cover the expenses of the HIRE business incentives. FATCA requires US taxpayers to declare any financial assets held outside the nation on an annual basis and pay any taxes owed on them. FATCA money is used to cover the expenses of the employment incentives provided by the HIRE Act.

Penalties are levied on US citizens who fail to register foreign account holdings and financial assets valued at more than $50,000 in any given year.

Who Needs to Comply With FATCA?

Any American taxpayer with financial holdings of $50,000 or more must submit Form 8938. These assets might be in the form of a bank account or stocks, bonds, or other financial instruments.

There are several exceptions. One notable exemption is for assets housed in a foreign branch of a US institution or a US branch of a foreign institution.

Foreign Institutions

Foreign financial institutions (FFI) and non-financial foreign enterprises (NFFE) are obliged to comply with this legislation by revealing to the IRS or the FATCA Intergovernmental Agreement the names of U.S. individuals with accounts and the amount of the assets in those accounts (IGA).

FFIs that do not comply with the IRS will be barred from the US market and will have 30% of any withholdable payment withheld as a tax penalty. Withholdable payments may include revenue earned by these institutions’ U.S. financial assets, such as interest, dividends, and periodic profits.

  Determining Adjustments to Income on Your Tax Return

FFIs and NFFEs that accede to the legislation are required to disclose yearly the name, address, and tax identification number (TIN) of each account holder who satisfies the qualifications of a U.S. citizen, as well as the account number, account balance, and any deposits and withdrawals on the account for the year.

Individual Taxpayers Living Abroad

Form 8938 is required by the IRS for taxpayers residing abroad in the following situations:

  • “You are married filing a joint income tax return, and the total worth of your designated foreign financial assets on the final day of the tax year is more than $400,000, or more than $600,000 at any point throughout the year.” These limits apply even if only one spouse lives overseas. Married couples filing a joint income tax return for the tax year will utilize a single Form 8938 to list any specified overseas financial assets in which either spouse has an interest.
  • “You are not a married individual filing a joint income tax return, and the total value of your designated foreign financial assets on the final day of the tax year is more than $200,000, or more than $300,000 at any point during the year.”

Foreign asset reporting limits differ depending on whether you file a combined income tax return and if you reside overseas. According to the Internal Revenue Service:

“If you are single or file separately from your spouse, you must submit a Form 8938 if you have more than $200,000 of specified foreign financial assets at the end of the year and you live abroad; or more than $50,000, if you live in the United States. If you file jointly with your spouse, these thresholds double. You are considered to live abroad if you are a U.S. citizen whose tax home is in a foreign country and you have been present in a foreign country or countries for at least 330 days out of a consecutive 12-month period.”

Individual Taxpayers Living in the U.S.

Form 8938 is required by the IRS for taxpayers resident in the United States who meet the following criteria:

  • “You are single and the total value of your designated foreign financial assets exceeds $50,000 on the final day of the tax year or $75,000 at any point during the tax year.”
  • “You are married filing a joint income tax return, and the total value of your designated foreign financial assets exceeds $100,000 on the final day of the tax year, or exceeds $150,000 at any point during the tax year.”
  • “You are married filing separate income tax returns and the total value of your designated foreign financial assets exceeds $50,000 on the final day of the tax year or $75,000 at any point during the tax year. Include one-half the value of any specified overseas financial asset jointly held with your spouse when computing the value of your specified foreign financial assets when applying this threshold. If you are compelled to submit Form 8938, however, disclose the total amount.”

Who Is a U.S. Person Under FATCA?

The phrase “United States person,” or USP, is used in the FATCA standards. A unique selling point may be any of the following:

  What Is Use Tax?

  • A US citizen or permanent resident
  • A domestic collaboration (organized in the United States)
  • A domestic company (incorporated in the United States)
  • Any estate that is not a foreign estate
  • Any trust if a court in the United States has primary supervision over its administration and one or more United States individuals have the ability to oversee all significant decisions of the trust.
  • The federal government of the United States, a state, or the District of Columbia (including any agency, instrumentality, or political subdivision thereof)
  • According to the significant presence test, a customer may be deemed a U.S. resident for tax purposes based on the time spent in the United States. The exam must be taken each year the person is in the United States.
  • Students (F1, OPT, J1, Q Visas) are classified as non-resident foreigners for up to five years and are excluded from the significant presence criteria.
  • Teachers and researchers (J1, Q Visas) are classified as non-resident immigrants for up to two years and are excluded from the significant presence requirement.
  • To meet the substantial presence test, other H1B, L1, and other visa holders must be physically present in the United States 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 preceding it, counting I all of the days the individual was present in the current year and (ii) 1/3 of the days the individual was present in the year before.
  • For the purposes of the significant presence requirement, F and J student visa holders must omit five calendar years of presence.
  • J non-student visa holders must wait two years.

Penalties for Non-Compliance

Failure to submit Form 8938 results in fines. The IRS may levy a $10,000 failure to file penalty, a $50,000 additional penalty if the guilty party continues to fail to file after being notified by the IRS, and a 40% penalty for understating taxes related to non-disclosed assets.

After a business submits its return for revenue exceeding $5,000 that is not disclosed and is related to a designated foreign financial asset, the statue of limitations is extended to six years. Furthermore, if a party fails to submit or correctly report an asset on Form 8938, the statute of limitations for the tax year is extended to three years from the time when the needed information is provided.

If the failure was due to a reasonable cause, the statute of limitations is extended only for the item or items relevant to the failure, not for the whole tax return.

If the failure to disclose is deemed reasonable, no penalty is levied; nevertheless, this is evaluated on a case-by-case basis.

The Cost of Compliance

Although the penalty for failing to comply with FATCA is severe, the compliance costs for international financial institutions are equally severe. Nigel Green, CEO of deVere Group and co-founder of the Campaign to Repeal FATCA, claimed that FATCA’s reporting requirements affected 250,000 international financial firms.

According to one Spanish bank, compliance could cost a small bank branch $8.5 million and a worldwide financial organization $850 million. Cost estimates for UK banking institutions ranged from $1.1 billion to $1.9 billion.

Criticism of FATCA

Of course, there are always some who oppose new tax legislation. According to Reuters, FATCA has enraged banks and industry leaders, who have labeled it “imperialist.” Financial firms opposed to the requirement that they report on their US customers or withhold 30% of their interest, dividend, and investment payments and transfer the money to the IRS.

  An Overview of Itemized Deductions

FATCA, according to tax attorneys at the Swiss-American Chamber of Commerce in Zurich, is a “neutron bomb of the global economic system” that would dissuade foreign investment in US markets.

Some detractors believed that the expense of adopting FATCA would be too onerous for international financial institutions, leading them to sell their holdings in the United States.

Foreign banks opposed to FATCA because it is onerous to their operations.

The Expat View

According to American Citizens Abroad, Americans living abroad must have assets and bank accounts in their place of residence. If these Americans are subject to Form 8938, they will face prejudice since Americans living in the United States are not obligated to register their assets for tax reasons. Because federal taxes are only charged on income and capital gains, only their income must be reported.

Overall, American Individuals Abroad believed that FATCA threatened billions of dollars in investment in the United States, the capacity of American corporations and financial institutions to compete in a global economy, and the ability of American citizens to dwell and prosper abroad.

What Is the Difference Between FATCA and FBAR?

Although the reporting requirements for FBAR and FATCA are similar, there are numerous important distinctions. Some assets should be revealed only in one form, while others must be stated in both.

The IRS requires the Report of Overseas Bank and Financial Accounts, or FBAR, for expatriates and other nationals who have certain foreign bank accounts. Trusts, estates, and domestic businesses with interests in overseas bank accounts must also submit FBARs.

Individual citizens, residents, and non-resident immigrants are all subject to FATCA.

Residents and companies in US territories are required to submit FBARs but are exempt from filing FATCA filings.

Foreign stocks and securities, partnership interests, hedge funds, and other private equity firms must be disclosed under FATCA. FBARs are needed for assets held in overseas branches of US banks, accounts with signature power, and indirect ownership or beneficial interests.

Is FATCA Only for U.S. Citizens?

FATCA applies to all US taxpayers with assets held overseas. Residents and green card holders are included, as are firms controlled by US citizens and anybody who spends a specific number of days in the US each year and has overseas accounts. FATCA applies to all banks worldwide that hold assets belonging to US taxpayers.

How Can I Avoid FATCA?

If you are an American taxpayer with assets housed in overseas financial institutions, there is no way to escape FATCA.

Moreover, the penalties for trying to avoid it are harsh.

The Bottom Line

The Foreign Account Tax Compliance Act (FATCA) compels US residents residing in the United States or overseas to make yearly reports on their foreign account holdings. Form 8938 must be completed and sent to the IRS. There are differing filing requirements and holding thresholds depending on whether a person lives in the United States or overseas. Whether you have assets in another country, you should check to see if you need to file, since there are severe consequences for failing to do so.

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