Did you know you must report your foreign assets and accounts with the Internal Revenue Service (IRS) to avoid offshore tax evasion? Suppose you have overseas financial accounts or deal with foreign institutions for business transactions. In that case, you must familiarize yourself with the Foreign Bank Account Report (FBAR) and Foreign Account Tax Compliance Act (FATCA) – including the correct forms you must file – to avoid penalties from the IRS.
This article will help you understand these compliance practices and walk you through the FATCA filing requirements and processes you must follow.
What is the Foreign Account Tax Compliance Act (FATCA)?
The Foreign Account Tax Compliance Act (FATCA) is part of the US government’s effort to prevent U.S. persons who maintain accounts and other financial assets abroad from evading taxes. If you belong to this sector, you must disclose FATCA tax reporting if your total assets exceed a specific amount.
If your foreign financial assets total exceeds the reporting threshold based on your filing status and whether you live in or outside of the U.S., FATCA reporting requirements will apply. This means that you will need to report applicable assets on Form 8938 along with your income tax return.
Who Should File Under FATCA?
Many assume that just because their finances and assets are offshore, there’s no need to file them with the IRS. However, this is not true. Here are some situations that can help you understand who must comply with FATCA.
These are the filing requirements covered under the act:
Taxpayers living in the U.S.
- Individuals who are not married or married taxpayers filing a separate return with assets worth at least $50,000 on the last day of the tax year or more than $75,000 at any other time.
- Those who are married and filing jointly possessing assets amounting to more than $100,000 on the last day of the tax year or more than $150,000 at any point in the year.
Taxpayers living outside the U.S.
- Individuals who are not married with assets valuing more than $300,000 at any time during the year or more than $200,000 on the last day of the tax year.
- Those who are married and filing jointly owned assets are estimated to be more than $400,000 on the last day of the tax year or more than $600,000 at any point in the year.
Other specified domestic entities
- The total worth of assets exceeded $50,000 on the last day of the tax period or surpassed $75,000 at any other point in the tax year.
Determining Foreign Financial Assets
You may be asking yourself already, what is a FATCA filing requirement? There are reporting conditions for U.S. taxpayers holding foreign financial assets.
As such, you must understand what a foreign financial asset is to determine if you are to file FATCA.
A foreign financial asset can come in various forms, such as a bank account in a foreign country. But there can be instances where you may assume a particular asset is not a foreign financial one. Some U.S. citizens often get in trouble for this reason.
You must also disclose other reportable assets, such as foreign entities’ ownership. Figuring out what is not to declare as foreign financial assets can get more confusing.
If you are uncertain about your tax situation, it is best to avail yourself of tax resolution services. Doing so will ensure you avoid penalties and unnecessary charges.
FATCA Filing Requirements
- U.S. taxpayers may need to file Form 8938 – The Statement of Specified Foreign Financial Assets with their yearly U.S. tax return.
The FBAR and Form 8938 are comparable, but the reporting thresholds for FATCA are more significant. You must also disclose particular “non-account” assets like ownership of businesses and trusts. This also includes some contractual investments made with international parties.
- Under FATCA reporting requirements, financial institutions abroad must provide information about U.S. citizens with accounts.
If you are a U.S. national opening a bank account in a country compliant with FATCA, that financial institution must declare your assets to the U.S. when it meets the threshold. This ensures that no U.S. citizen will practice tax evasion due to the non-reporting of foreign assets.
The due dates for Form 1040 are the same as Form 8938. You should submit these along with your U.S. tax return.
Get Help With Your FATCA Filing Today
Filing taxes and reviewing foreign financial assets requirements can be challenging for some. But there are guidelines to simplify the process. These guidelines will make it easier to determine your reporting thresholds and what forms you need to fill out.
You can always seek the assistance of a tax professional if you find yourself at a crossroads. Tax Samaritan has offered the best-in-class service for U.S. expats since 1997.