- The Foreign Account Tax Compliance Act (FATCA) was introduced in the HIRE Act of 2010 and aims to combat tax evasion
- FATCA requires that specified foreign financial assets be reported on taxpayers’ tax returns above certain thresholds
- Individual taxpayers reporting foreign assets use Form 8938, Statement of Specified Foreign Financial Assets, to report foreign account holdings
- For single filers living in the U.S., the threshold for specified foreign assets is over $50,000 on the last day of the tax year or over $75,000 at any time in that year; those numbers double for joint filers
- For single filers living abroad, the threshold for specified foreign assets is more than $200,000 on the last day of the tax year or over $300,000 at any time during the year; those numbers double for joint filers
- Specified foreign financial assets include foreign stock and securities, foreign financial accounts, foreign assets, and more
- Certain exemptions apply, including assets in a foreign branch of a U.S. financial institution or assets in a foreign institution’s U.S. branch
- Steps to comply with FATCA requirements:
- Determine your status
- Determine if your assets are reportable
- Ensure FATCA compliance
- Gather documentation
- Report bank accounts
- Report assets
- Report trusts or foundations
- Report gifts or inheritances
- File your tax return
- Report foreign income and deductions
Holding offshore accounts is not illegal, but taxpayers must disclose their foreign accounts and assets to the IRS, since all U.S. citizens’ income and assets are taxable. U.S. taxpayers with offshore assets may be subject to the Foreign Account Tax Compliance Act (FATCA) reporting requirements. This typically involves filing Form 8938, Statement of Specified Foreign Financial Assets, to report foreign account holdings to the IRS. Understanding FATCA reporting thresholds can be a daunting task, but failing to comply can result in penalties.
FATCA was created to help the IRS combat tax evasion, which continues to be a problem in the U.S. The IRS estimates that only about 85% of taxes are paid voluntarily and on time each year.
Resident aliens may have offshore assets that are subject to FATCA reporting requirements. Understanding whether your offshore assets meet the FATCA reporting thresholds is essential to ensure compliance with U.S. tax laws and avoid IRS trouble.
This blog post sheds light on FATCA reporting requirements for offshore assets for a resident alien, explains Form 8938, and provides tips to help you meet the standards established by the IRS. Let’s dive into what FATCA is, when to use Form 8938, and what you need to know to ensure compliance.
What Is FATCA Reporting?
FATCA is a federal law that outlines reporting requirements for U.S. citizens and residents to report their offshore accounts to the IRS. The law, which came into effect in 2010 as part of the HIRE Act (Hiring Incentives to Restore Employment Act), was enacted to prevent U.S. taxpayers from hiding offshore assets and income to evade paying taxes on those assets. Part of the revenue that comes in from FATCA is used to pay for business initiatives that the HIRE Act introduced.
FATCA compliance requires taxpayers to report their specified foreign financial accounts and requires foreign financial institutions to identify, document, and report information on all U.S. account holders, regardless of the account balance. The information reported includes the taxpayer’s name, address, taxpayer identification number, account number, account balance, and interest earned.
Individual taxpayers reporting foreign assets will use Form 8938, Statement of Specified Foreign Financial Assets, to report their foreign account holdings. Failure to comply with FATCA reporting requirements can result in substantial penalties and even legal trouble, so you always need to know your responsibilities.
FATCA Reporting Thresholds
Meeting FATCA reporting thresholds can be a challenging task for U.S. taxpayers with offshore assets. Taxpayers must disclose all foreign financial assets on their tax returns, including bank accounts, investments, brokerage accounts, and certain foreign retirement plans.
The reporting thresholds for foreign financial assets depend on your filing status and where you live. Single and married-filing-separately taxpayers living in the U.S. must report their foreign financial assets to the IRS if the total value of these assets is over $50,000 on the last day of the tax year or $75,000 at any time during the year. Married-filing-jointly filers living in the U.S. have a threshold of $100,000 on the last day of the tax year or over $150,000 on any day during the year.
Single filers living abroad have a threshold of $200,000 on the last day of the tax year or $300,000 at any time during that year, and joint filers living abroad have thresholds of $400,000 and $600,000, respectively. The IRS considers you to be living abroad if you “are a U.S. citizen whose tax home is in a foreign country and you have been present in a foreign country or countries for at least 330 days out of a consecutive 12-month period.”
Carefully review your asset value and the types of assets you hold. Noncompliance with FATCA reporting requirements is something you always want to avoid, so it is essential to stay informed and act as soon as possible.
Assets Subject to FATCA Reporting
Taxpayers with assets held outside the U.S. need to take a close look at all their financials to prepare for FATCA foreign assets reporting. What do you need to report on Form 8938? Here’s a list of specified foreign financial assets that are generally subject to FATCA reporting:
- Foreign bank accounts: Any bank accounts or offshore financial accounts, including checking, savings, and brokerage accounts, that are held outside of the U.S. are reportable.
- Foreign mutual funds: You must report any investment funds, such as mutual funds, held outside of the country, including interests in foreign private equity funds and hedge funds.
- Foreign stocks and securities: Report any stocks or other securities issued by non-U.S. entities.
- Foreign life insurance policies: Any cash value or investment-oriented life insurance policies issued by a foreign insurer or held in a foreign country are reportable.
- Foreign trusts and foundations: Certain foreign trusts and foundations that are considered to be grantor trusts or have a U.S. beneficiary or owner are applicable to FATCA.
- Offshore annuities: Report any fixed or variable annuities issued by a foreign insurer or held in a foreign country.
- Income earned from foreign sources: Any income earned from non-U.S. sources, including rental income, dividends, and interest, is subject to FATCA reporting.
- Foreign retirement plans: Certain foreign pension plans and retirement accounts that are not recognized under the U.S. tax code are reportable.
- Offshore accounts maintained by U.S. entities: You need to report offshore accounts maintained by U.S. corporations, partnerships, and other entities that have a beneficial owner who is a U.S. taxpayer.
- Cryptocurrency accounts: Offshore accounts held to transact in cryptocurrencies, including virtual wallets, trading accounts, and investment accounts, are reportable.
It’s important to note that FATCA reporting requirements and exemptions may vary depending on the specific circumstances of each taxpayer. This is why it is essential to consult a tax professional or legal advisor to determine what assets are subject to FATCA reporting and what exemptions may apply.
Who Is Exempt From FATCA Reporting?
FATCA imposes reporting requirements on foreign financial institutions and U.S. taxpayers with offshore assets, but certain individuals and entities may be exempt from these reporting requirements. You may be wondering, “Am I exempt from FATCA reporting?”
Not all offshore assets are applicable to FATCA reporting. You do not have to report the following assets, as they are not considered specified foreign financial assets:
- U.S.-payor maintained financial accounts, including payors that are:
- A U.S. branch of a foreign financial institution
- A foreign branch of a U.S. financial institution
- Certain foreign subsidiaries of American corporations
- Foreign trust or estate beneficial interests, if you don’t know the interest. You are considered to know of your interest if you receive a distribution from a foreign trust or estate
- Social Security, social insurance, or similar government program interest
The IRS also states that you don’t have to report specified foreign financial assets on Form 8938 if you have already reported them on other forms, including:
- Form 3520 or 3520-A for trusts and foreign gifts
- Form 5471 for foreign corporations
- Form 8621 for passive foreign investment companies
- Form 8865 for foreign partnerships
- Form 8891 for registered Canadian retirement savings plans
Remember that exemptions vary depending on your situation. Tax laws frequently change with new legislation that could impact these guidelines. Consult with a legal tax advisor to determine whether you are eligible for any FATCA exemptions and what you should do next.
10 Steps to Comply With FATCA Reporting Requirements
U.S. citizens and residents have additional concerns to factor in to ensure they’re complying with requirements for their offshore assets. Where do you start? Here are ten steps for resident aliens to comply with FATCA reporting requirements for offshore assets:
1. Determine Your Status
The first step is to figure out whether you’re a U.S. taxpayer and a resident alien. Resident aliens, for the purposes of FATCA, are considered to be U.S. persons and are subject to FATCA reporting requirements. Resident aliens either meet the green card test or the substantial presence test for the applicable year. Resident aliens use the same forms and filing statuses as U.S. citizens and can claim the same deductions as well.
2. Determine Whether Your Offshore Asset Is Reportable
FATCA reporting applies to a wide range of foreign financial assets. These include bank accounts, mutual funds, trusts, and other investments.
3. Ensure FATCA Compliance
Ensure your foreign financial institution is FATCA-compliant and willing to report the required information to the IRS. You can contact your financial institution to make sure they are registered with the IRS to comply with FATCA.
4. Gather Documentation
Gather all the necessary information regarding your offshore assets. This can include the type of asset, its value, and the institution or custodian that holds the asset.
5. Report Qualifying Bank Accounts
Form 8938 reporting is different from the FinCEN Form 114 reporting requirement for Foreign Bank and Financial Accounts (FBAR). You may have to file both forms, and if you don’t, you may incur separate penalties for each. Report foreign bank accounts by filing the FBAR form FinCEN 114 if the aggregate value of your foreign financial accounts exceeds $10,000 at any time during the year.
6. Report Qualifying Assets
Report foreign financial assets, as well. These include accounts, stocks, and securities, if their aggregate value exceeds the aforementioned thresholds on Form 8938.
7. Report Qualifying Trusts or Foundations
Report certain foreign trusts or foundations as well, if applicable. These are reported with Form 3520.
8. Report Qualifying Gifts or Inheritances
Report receipts of foreign gifts or inheritances exceeding certain thresholds. Use Form 3520, if applicable, for these receipts.
9. File Your Tax Return
File an annual U.S. income tax return. You will likely use either Form 1040 or Form 1040-NR if you earned income from any sources in the U.S. or abroad.
10. Report Foreign Income and Deductions
Report your foreign income on your U.S. tax return. Be sure to also claim any applicable foreign tax credits or deductions for taxes paid to a foreign country.
Always stay aware of changes in FATCA reporting requirements or regulations that may affect your compliance status. Meet with a tax attorney to understand how changes to the law impact your assets and taxes. Seek professional advice or further clarification from the IRS if you’re not sure about your reporting requirements as a resident alien.
Contact an Attorney at Silver Tax Group for Assistance
U.S. citizens and resident aliens are required to file a tax return in most cases. You need to know how to comply with laws like FATCA if you have foreign assets or accounts, in addition to requirements for FBAR. These regulations can become complicated fast, and you never want to miss anything or make a mistake.
The team of tax attorneys at Silver Tax Group is ready to help you get everything done right. We closely examine your situation, provide guidance, and help you with tax preparation and reporting. We also help with tax debt resolution, emergency tax services, audit defense, IRS investigations, accounting, and much more. Reach out to Silver Tax Group to speak to a tax expert about FATCA thresholds and reporting requirements.