Answers to Frequently Asked FATCA Reporting Questions by James W. Spencer, CPA
Posted on November 14, 2022
The U.S. government first enacted the Foreign Account Tax Compliance Act (FATCA) over a decade ago to combat the global issue of tax evasion and make it more difficult for individuals and businesses to hide assets offshore and outside the purview of U.S. tax authorities. While foreign financial institutions bear much of the responsibility for catching tax evaders, the law also places an obligation on U.S. individuals and businesses to annually self-report financial interests they hold overseas. For this reason, it is critical that affected taxpayers understand their basic self-reporting responsibilities or risk significant tax and criminal penalties as well as a potential freeze on their foreign bank accounts.
Who Must Comply with FATCA Reporting?
FATCA’s self-reporting requirements apply to the following individuals with an interest in foreign financial assets:
- U.S. citizens
- Resident aliens (RAs) who pass the green card test or the substantial presence test for any portion of a taxable year
- Non-resident aliens (NRAs) who elect to be treated as resident aliens for purposes of filing tax returns.
Generally, the reporting requirement is based on where the individual lives and the value of his or her foreign assets.
For example, individuals living in the U.S. must self-report when the total value of their specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. For married couples filing joint tax returns, the reporting requirement is effective when the value of foreign assets exceeds $100,000 on the last day of the year or $150,000 at any time during the tax year.
Individuals living abroad have a self-reporting requirement when foreign financial assets exceed $200,000 on the last day of the tax year or more than $300,000 at any time during the year. The reporting threshold for married couples filing joint tax returns is $400,000 in foreign assets at the end of the tax year or more than $600,000 at any time during the year.
What Foreign Financial Assets Must I Report Under FATCA?
Individuals must report the following foreign assets held for investment and not for use in a trade or business:
- Financial accounts maintained by foreign financial institutions
- Financial accounts maintained by financial institutions organized under the laws of the U.S.
- Stock or securities issued by non-U.S. persons
- Financial instruments with non-U.S. issuers or counterparties
- Interests in foreign entities, including foreign trusts and estates
Exceptions to these reporting requirements exist for the following items that are not considered specified foreign financial assets:
- Financial accounts maintained by a U.S. payor, including U.S. branches of foreign financial institutions, foreign branches of U.S. financial institutions and certain foreign subsidiaries of U.S. corporations
- Certain beneficial interests in foreign trusts and foreign estates in which the taxpayer is unaware of those interests
- Interests in social security, social insurance or a similar program of a foreign government.
How Do I Report Foreign Financial Assets?
The IRS requires U.S. taxpayers to report foreign financial assets using Form 8938, Statement of Specified Foreign Financial Assets and/or FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), depending on the assets held. The filing of one form does not exclude a taxpayer from his or her obligation to file the other report. You can read more about these filing requirements here.
How Can I Correct Unreported Foreign Assets and Resolve Outstanding Tax Liabilities?
The IRS offers delinquent taxpayers a few opportunities to disclose and pay taxes on previously unreported foreign assets. For example, individuals who can certify that their failure to disclose offshore accounts and pay related tax liabilities was neither willful nor deliberate may take advantage of the IRS’s streamlined filing compliance procedure, which requires they file delinquent or amended tax returns for the prior three years and delinquent FBARs for each of the most recent six years and pay the full amount of tax and interest due. While the streamlined filing procedures allow taxpayers living abroad to come into compliance free of penalties, those individuals living in the U.S. will incur a delinquent penalty equal to 5 percent of their foreign asset holdings.
Alternatively, taxpayers whose reticence was based on their ability to meet the non-willful standard may take advantage of the IRS’s Delinquent FBAR Submission Procedures (DFSP) if they properly reported on a U.S. tax return and paid all relevant taxes on income generated from their foreign financial accounts. Using this option in which the IRS presumes that income tax returns were timely filed, all penalties will be waived provided the IRS has not already contacted the taxpayer regarding an income tax examination or a request for delinquent returns for the years in which taxpayers submitted delinquent FBARs. If this criterion is not met, taxpayers should consider disclosing unreported assets under the streamlined procedures.
About the Author: James W. Spencer, CPA, is a director of International Tax Services with Berkowitz Pollack Brant, where he focuses on a wide range of pre-immigration, IC-DISC, transfer pricing and international tax consulting issues for individuals and businesses. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or firstname.lastname@example.org.