If you're considering internationally diversifying your wealth, it's worth familiarizing yourself with the tax implications of having assets outside of the U.S. and its territories. That means getting to understand the basics of the Foreign Account Tax Compliance Act (FATCA). We have already posted an article about the topic in March (find the previous FATCA post here) but this time we will spend less time explaining the act and focus more on who it applies to. Before we start, however, please note that we are not tax professionals, this article is just for educational purposes. If you need specific tax advice for your personal situation, we kindly ask you to consult with your tax attorney.
What Is FATCA?
FATCA came into effect to account for funds held abroad by those living and working in the U.S. It's essentially a way for the government to tax revenue earned by their citizens and residents. The money collected is earmarked for domestic employment programs.
These factors not only affect individuals but financial institutions as well. If a foreign bank or financial institution has American clients or customers, they must report the value of the accounts to the Internal Revenue Service. Those that don't may face fines and restrictions from the U.S. market.
Who Must File FATCA?
If a taxpayer has funds held by a financial institution outside of the United States, they may be required to report them on your taxes. The Act created form 8938 for the reporting of such funds. So, ultimately, it comes down to whether or not you're required to file form 8938 with your taxes.1
You use form 8938 if all three of these factors apply.
Factor #1: You’re a U.S. Citizen or Domestic Entity
You're a U.S. citizen or resident (called a specified individual) or a specified domestic entity. This latter term refers to a corporation, partnership or domestic trust where a specified individual owns or holds 50 percent or more.2
Factor #2: You Hold Certain Financial Assets
You hold an interest in "specified foreign financial assets." Such interest could refer to a financial account (such as a bank account), stocks or securities issued by an entity outside of the U.S., interest in a foreign entity (for instance, owning a company outside the U.S.), or any financial instrument or contract of foreign origin.
Factor #3: The Reporting Threshold Is Passed
The total value of these foreign assets surpasses the reporting threshold specific to you. These thresholds may vary.
For specified domestic entities, the thresholds are:2
- Single filers or married filing separately: $50,000 at the end of the tax year or $75,000 or more during the tax year.
- Married filing jointly: $100,000 at the end of the tax year or $150,000 or more during the tax year.
For taxpayers living abroad, the thresholds are:2
- Single filers or married filing separately: $200,000 at the end of the tax year or $400,000 or more during the tax year.
- Married filing jointly: $400,000 at the end of the tax year or $600,000 or more during the tax year.
In many cases, if you're reporting money on another tax form, it doesn't need to be reported again on form 8938. Instead, you should advise which forms report the assets.3
These exceptions may include reported assets such as:
- Trusts or foreign gifts
- Foreign corporations
- Passive foreign investment companies
- Foreign partnerships
- Registered Canadian retirement savings plans
Additionally, you don't need to report a safe deposit box held in a foreign financial institution. For form 8938, it isn't an applicable financial account. Owning shares in a U.S. mutual fund that owns foreign securities or stocks is another exception to the rule for reporting. So long as the mutual fund in question is U.S.-based, it does not get reported on form 8938.4
What Happens If I Don’t Report?
The initial penalty for not filing is $10,000. If the IRS contacts the taxpayer and takes no action, an additional $50,000 penalty may be imposed, with a 40 percent penalty on those undisclosed assets.3
Under certain circumstances, the IRS may extend the statute of limitations to six years, if the amount omitted is more than $5,000.3 While consideration will be given to "reasonable cause" for omissions, the taxpayer will likely need to prove to the I.R.S. that it was for reasons apart from willful neglect.
FATCA vs. FBAR
It's important to note that FACTA does not preclude the Report of Foreign Bank and Financial Accounts, known as FBAR. Most people required to file form 8938 will likely need to file an FBAR as well.
If the total value of your financial accounts totals $10,000 at any point during the year, you're required to file the report. It's important to note that this threshold refers to the total amount held across all accounts.5
If you're doing business abroad, discuss any potential tax obligations with your trusted financial professional.
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