The Foreign Account Tax Compliance Act (FATCA), enacted in 2010 as part of the HIRE Act, significantly impacts American expatriates by addressing tax evasion involving financial assets held overseas. It was introduced in response to a 2009 scandal involving Swiss banks that sheltered U.S. taxpayer assets from the IRS.

FATCA requires U.S. taxpayers, including those abroad, to report foreign financial accounts and assets if their total value exceeds certain thresholds. Non-compliance can lead to severe penalties, making it vital for U.S. expats to understand and follow the law.

Who needs to comply?

FATCA, or the Foreign Account Tax Compliance Act, primarily applies to U.S. citizens, green card holders, and certain U.S.-based entities with substantial foreign financial connections. Specifically, FATCA compliance is required for:

U.S. Citizens and Residents: This includes anyone who holds U.S. citizenship, regardless of where they reside. Even if you live abroad, as long as you are a U.S. citizen or resident (including green card holders), you must report your foreign financial assets if they exceed certain thresholds.
U.S. Business Owners Abroad: U.S. individuals who own or are majority shareholders in foreign corporations are also subject to FATCA reporting. This extends to U.S.-registered corporations, partnerships, and trusts that have significant foreign financial dealings.
Accidental Americans: This term refers to individuals who may not even realize they are considered U.S. taxpayers. For example, someone born in the U.S. but raised abroad, or someone with a U.S. parent, might unknowingly be subject to FATCA. These individuals, often unaware of their U.S. tax obligations, must still comply with FATCA requirements if their foreign financial assets meet the reporting thresholds.
Foreign Financial Institutions (FFIs): While not directly U.S. entities, foreign banks and financial institutions are also impacted by FATCA. They must report U.S. account holders to the IRS or face penalties, which has led some institutions to avoid serving U.S. customers altogether.

Reporting requirements

FATCA imposes specific reporting requirements on U.S. taxpayers with foreign financial assets. If you fall within the categories described in the previous section, it’s crucial to understand these requirements to avoid significant penalties.

Thresholds for reporting

The need to file under FATCA is triggered by the total value of your foreign financial assets. For U.S. citizens living abroad, the threshold is $200,000 for single filers at the end of the tax year or $300,000 at any time during the year. For those married filing jointly, the threshold increases to $400,000 at the end of the year or $600,000 at any time during the year.
If you live in the U.S., these thresholds are significantly lower: $50,000 at the end of the year or $75,000 at any time during the year for single filers.

IRS Form 8938

U.S. taxpayers who meet the FATCA thresholds must file IRS Form 8938, “Statement of Specified Foreign Financial Assets,” along with their annual tax return. This form requires detailed reporting of various types of foreign assets, including bank accounts, stocks, bonds, and foreign pensions.
Form 8938 must be attached to your federal tax return, and failure to file can result in substantial penalties. In addition to the standard $10,000 penalty, further non-compliance after an IRS notice can result in additional fines up to $50,000.

Overlap with FBAR:

FATCA’s reporting requirements often overlap with those of the FBAR (Report of Foreign Bank and Financial Accounts), which requires U.S. taxpayers to report foreign financial accounts that exceed $10,000 at any time during the year. However, while FBAR is filed separately with the Financial Crimes Enforcement Network (FinCEN), FATCA Form 8938 is submitted directly to the IRS .
It’s important to note that satisfying FBAR requirements does not exempt you from FATCA reporting if your foreign assets exceed the FATCA thresholds. Both forms may need to be filed if your financial situation warrants it .

Types of assets covered:

The types of assets that must be reported under FATCA include foreign financial accounts, foreign-issued life insurance policies with a cash value, foreign pensions, and interests in foreign entities such as trusts or partnerships. Additionally, any foreign investment assets like stocks, bonds, or mutual funds held outside of U.S. financial institutions are subject to FATCA reporting .
There are certain exceptions, such as foreign real estate held directly (without using a foreign entity) and personal property like jewelry or artwork, which do not need to be reported on Form 8938.

Impact on foreign financial institutions and penalties for non-compliance

The Foreign Account Tax Compliance Act (FATCA) has significantly impacted not only U.S. taxpayers but also foreign financial institutions (FFIs) worldwide. Under FATCA, FFIs are required to identify and report information on accounts held by U.S. persons, including individuals and entities with substantial U.S. ownership. The goal of this legislation is to prevent tax evasion by ensuring that U.S. taxpayers accurately report their global income and foreign financial assets to the IRS.

Compliance requirements for foreign financial institutions

Foreign financial institutions must adhere to strict compliance procedures under FATCA, which include:

Identifying U.S. Account Holders: FFIs must conduct due diligence to identify accounts held by U.S. taxpayers. This includes verifying the account holder’s name, address, Tax Identification Number (TIN), account balance, and income earned from the account. They must also report accounts held by foreign entities with significant U.S. ownership.
Reporting to the IRS: Once U.S. accounts are identified, FFIs are required to report this information directly to the IRS. The reporting obligations include providing detailed account information and ensuring that all data is accurate and complete.

Penalties for non-compliance

The consequences for foreign financial institutions that fail to comply with FATCA can be severe:

30% Withholding Tax: FFIs that do not comply with FATCA reporting requirements face a 30% withholding tax on all U.S.-sourced payments. This penalty applies to various types of income, including interest, dividends, and gross proceeds from the sale of U.S. securities.
Global Impact: Due to the risk of such substantial penalties, many FFIs have invested heavily in compliance infrastructure to meet FATCA requirements. Some institutions have even chosen to limit or refuse services to U.S. clients altogether to avoid the complexities and risks associated with FATCA compliance.