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WhAT IS

Foreign Account Tax Compliance ACT (FATCA)?

TABLE OF CONTENTS:

  • Introduction
  • How does FATCA affect US Citizens? Who must file Form 8938?
  • What are the filing thresholds for Form 8938?
  • What are specified Foreign Financial Assets? What are the penalties for Non-Compliance with Form 8938?
  • Final Words 

INTRODUCTION

The Foreign account tax compliance act, also known as “FATCA” was passed as part of the HIRE Act, generally requires that Foreign financial institutions and certain other non-financial foreign entities report on the foreign assets held by their U.S. account holders or be subject to withholding on withholdable payments. So whenever, you set up a new bank account in a foreign country with a foreign financial institution, it may ask you for information regarding your US Citizenship or your Green Card Status. Yes, this is the industry practice now, worldwide.

The main idea behind FATCA was to keep tax evasion at bay by wealthy American Citizens who were allegedly hiding their foreign stash in tax havens abroad. Unfortunately, working expats, inpats, green card holders are now at the receiving end of this tax policy.  They are burdened with this additional compliance work.

How does FATCA affect US CITIZENS? who must file form 8938?

 

Under FATCA, US taxpayers (Citizens/Green Card Holders/Residents) holding financial assets outside the United States must report those assets to the IRS generally using Form 8938 – Statement of Specified Foreign Financial Assets.

As per the IRS, a “ Specified individual ” is:

●  A U.S. citizen

●  A resident alien of the United States for any part of the tax year.

●  A nonresident alien who makes an election to be treated as a resident alien for purposes of filing a joint income tax return

●  A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico (See Publication 570 for the definition of a bona fide resident).
The specified individual whose aggregate value of these assets exceeds $50,000 or is above the threshold limits given below, must report these assets on Form 8938.

Form 8938 is attached to your US Tax return. If you do not have the filing requirement for the tax year,  you do not have to file Form 8938, regardless of the value of their specified foreign financial assets.

If you do have to file Form 8938, based on the threshold amounts, most likely, you will have a filing requirement for FinCen 114 or the FBAR.

REMEMBER!! Form 8938 goes along with your tax return to the IRS. FBAR or FinCen 114 goes to the department of treasury, not the IRS.

It’s a separate filing!

WHAT ARE THE FILING THRESHOLDS FOR FATCA FORM 8938?

The below are the thresholds for filing Form 8938 with your tax return. (For differences between FBAR & FORM 8938) Click here

Filing Status

Single/Unmarried

Married Filing Jointly

Married Filing Separate

Taxpayers living in the US

$50k on the last day of the tax year, or $75k any time during the year(whichever is higher)

Taxpayers living Abroad

$200k on the last day of the tax year, or $300k any time during the year(whichever is higher)

$100k on the last day of the tax year, or $150k any time during the year(whichever is higher)

$400k on the last day of the tax year, or $600k any time during the year(whichever is higher)

$50k on the last day of the tax year, or $75k any time during the year(whichever is higher)

$200k on the last day of the tax year, or $300k any time during the year(whichever is higher)

FATCA FORM 8938
LIKE FBAR, FORM 8938 EXISTS PURELY FOR REPORTING PURPOSES

What are specified FOREIGN FINANCIAL ASSETS UNDER FATCA?

The IRS defines it as “ Financial assets include foreign financial accounts and foreign non-account assets held for investment (as opposed to held for use in a trade or business), such as foreign stock and securities, foreign financial instruments, contracts with non-U.S. persons, and interests in foreign entities”.

There are exceptions to the reporting requirement. For example, you do not have to report the following assets because they are not considered specified foreign financial assets:

●  A financial account maintained by a U.S. payor. A U.S. payor includes a U.S. branch of a foreign financial institution, a foreign branch of a U.S. financial institution, and certain foreign subsidiaries of U.S. corporations. Therefore, financial accounts with such entities do not have to be reported.

●  A beneficial interest in a foreign trust or a foreign estate, if you do not know or have reason to know of the interest. If you receive a distribution from a foreign trust or foreign estate, however, you are considered to know your interest in the trust or estate.

●  An interest in social security, social insurance, or another similar program of a foreign government.

Other exceptions from reporting on Form 8938

If you reported specified foreign financial assets on other forms, you do not have to report them a second time on Form 8938. These include interests in 

  • trusts and foreign gifts reported on Form 3520 or Form 3520-A (filed by the trust); 
  • foreign corporations reported on Form 5471; 
  • passive foreign investment companies reported on Form 8621; 
  • foreign partnerships reported on Form 8865.

The value of the foreign financial assets reported on these forms is included in determining the total value of assets for the reporting threshold, but you do not have to list the assets on Form 8938. In this situation, identify on Form 8938 which and how many of these form(s) report the specified foreign financial assets.

Also, you do not need to report on Form 8938.

●  Foreign real Estate held directly

●  Foreign currency

●  Precious metals

●  Art, antiques, jewelry & Cars

●  Social security – Type Program benefits given by Foreign Government.

What are the penalties for Non-compliance of FATCA FORM 8938?

Failure to report foreign financial assets on Form 8938 may result in a penalty of $10,000 (and a penalty up to $50,000 for continued failure after IRS notification). Further, underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40 percent. Criminal penalties could also apply.

The IRS statute of limitations is extended to six years after you file your return if you omit from gross income more than $5,000 that is attributable to a specified foreign financial asset, without regard to the reporting threshold or any reporting exceptions. If you fail to file or properly report an asset on Form 8938, the statute of limitations for the tax year is extended to three years following the time you provide the required information. If the failure is due to reasonable cause, the statute of limitations is extended only about the item or items related to such failure and not for the entire tax return.

If you prove that any failure to disclose is due to reasonable cause and not due to willful neglect, no penalty will be imposed for failure to file Form 8938, however. Reasonable cause is determined on a case-by-case basis, considering all relevant facts and circumstances.

Most tax assignees in the 1st year of their US Tax Return, or a US expat moving abroad for the 1st time haven’t got a clue about these Foreign assets compliance may end paying a heavy penalty. As previously mentioned FATCA was initiated to keep Tax evasion and money laundering in check. The uncomfortable truth is that innocent working tax assignees are caught up in this cross-fire.

Conclusion

Specified individuals who own specified foreign financial assets above a certain threshold must report it on Form 8938. The biggest problem is that most US expats in their 1st year of their foreign assignment, do not have any idea about this regulation. Most are under the impression that their Foreign bank, Foreign pension, Foreign life insurance with cash surrender value should not be reported on their US Tax Return. Unfortunately, that isn’t the case. The same would apply to an Inpat coming to the US, who has never Filed a US tax return. Being completely unaware of the US Tax laws can result in severe penalties for these tax assignees. It’s strongly recommended that you reach out to a Qualified Accountant who has experience with Foreign Forms in the 1st year of your assignment in & out of the US.

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