Foreign Account Tax Compliance Act (FATCA Form 8938)

As you may have heard or seen in the media, the United States government has ramped up its efforts to combat tax evasion through a law known as FATCA. The law has significantly influenced the information reporting relationships between the U.S. and foreign governments. The law also has practical tax compliance implications for U.S. expats, including the requirement to file FATCA Form 8938.

Introduction to FATCA

Last Update: January 2023

FATCA stands for the “Foreign Account Tax Compliance Act.” FATCA was enacted in 2010 as part of the HIRE Act. The objective behind FATCA is to combat offshore tax evasion by requiring U.S. citizens to report their holdings in foreign financial accounts and their foreign assets on an annual basis to the IRS.

As part of the implementation of FATCA, starting with the 2011 tax season, the IRS requires certain U.S. citizens to report the total value of their “foreign financial assets” on their personal tax returns by attaching FATCA Form 8938. In order to understand how FATCA works, a number of concepts must first be explained and defined.

When is FATCA Form 8938 Reporting Required?

If you reside outside the U.S. and have a bank account or investment account in a foreign financial institution, you are generally required to include FATCA Form 8938 with your U.S. federal income tax return if you meet the following thresholds:

  • You are filing a return other than a joint return and the total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year; or
  • You are filing a joint return and the value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

In addition to listing the accounts and their maximum values during the tax year, the FATCA Form 8938 requires taxpayers to list income reported on the tax return relating to the accounts. As to these, various tax items must be specified (interest, dividends, royalties, etc.), the amount reported must be provided, and the corresponding reporting on the tax return must be provided (i.e., which form and line or which schedule and line).

What is the difference between FATCA and FBAR?

It is fairly common to confuse FATCA with FBAR. Both are reporting requirements related to foreign bank accounts held by U.S. citizens and require some form of reporting to the Government. One key difference is the purpose of the filings. Whereas FATCA reporting is part of the compliance mandated by the Internal Revenue Code, FBAR is technically a reporting requirement required under the Bank Secrecy Act.

Another key difference (for individuals) is that the FBAR is reported on Form 114 directly to the U.S. Treasury and is generally triggered by a much lower threshold (an aggregate balance of $10,000 in all foreign accounts). FATCA, on the other hand, is triggered for an individual only if you meet the criteria listed above and, if so, then the foreign account balances are reported on Form 8938 as part of your tax return.

Finally, another key distinction is that FBAR is purely informational whereas the goal of Form 8938 is to pick up on unreported income earned on foreign assets by tying the assets to the income earned on those assets.

For a helpful side-by-side comparison of the FBAR and FATCA filing rules as they apply to particular foreign assets, you can visit the IRS webpage dedicated to this topic:

FATCA Penalties

Penalties for the failure to file FATCA Form 8938 can be severe.

First, the failure to file the form can result in a civil penalty of $10,000 per form. This penalty is increased by $10,000 (up to a maximum of $50,000) for each 30-day period that the failure continues for more than 90 days after the IRS mails you a notice of your failure to file.

Additional penalties can also be imposed if you underpay your tax as a result of a transaction involving a foreign financial asset that was not disclosed on the form. In addition to the civil penalties, the IRS states in its instructions to the form that if you fail to file Form 8938, fail to report an asset, or have an underpayment of tax, you may you may be subject to criminal penalties.

Reporting for Foreign Financial Institutions

In order to further enforce FATCA reporting, starting on January 1, 2014, foreign financial institutions (“FFIs”) (which include just about every foreign bank, investment house and even some foreign insurance companies) became required to report the balances in the accounts held by customers who are U.S. citizens.

FFI information is reported to the IRS either directly or through the government of the jurisdiction in which the FFI resides. To this end, the U.S. government has signed a number of so-called intergovernmental agreements (“IGAs”) with partner countries that have agreed to exchange information using digital exchange programs.

Many of the FATCA partner countries and their foreign financial institutions have made substantial efforts to become FATCA compliant, knowing that otherwise they and their account holders may become subject to a severe 30% withholding tax on U.S.-source payments such as interest and dividends.

Recently, several important deadlines have passed for FFIs with respect to FATCA reporting. For instance, the deadline has now passed for for FFIs in non-IGA jurisdictions to submit account information from the previous year. So has the deadline for FFIs in IGA jurisdictions to submit account information. Digital information exchanges have also now begun between the U.S. and its FATCA-ready partners, and the IRS is receiving account information that previously would have been inaccessible.

Other Practical Implications

To date, we have seen a number of large foreign banks require that all U.S. citizens who maintain accounts with them provide a Form W-9 (declaring their status as U.S. citizens) and sign a waiver of confidentiality agreement whereby they allow the bank to provide information about their account to the IRS. In some cases, foreign banks have closed the accounts of U.S. expats who refuse to cooperate with these requests.

It is this ongoing effort by the U.S. government to combat offshore tax evasion through FATCA that has led to a surge in tax compliance efforts by U.S. expats, as well as the advent of amnesty opportunities being offered by the IRS.

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