Foreign Account Tax Compliance Act (FATCA) - New Reporting & Compliance Requirements
The Foreign Account Tax Compliance Act (FATCA) is an important development in U.S. efforts to improve tax compliance involving foreign financial assets and offshore accounts.
Under FATCA, U.S. taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS. This reporting will be made on Form 8938, which taxpayers attach to their federal income tax return, starting with the 2011 tax filing season. In addition, FATCA will require foreign financial institutions to report directly to the IRS information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers have signature authority over or hold a substantial ownership interest. Failure to report foreign financial assets on Form 8938 will result in a penalty of $10,000 (and a penalty of up to $50,000 for continued failure after IRS notification).
Specified foreign financial assets generally include the following assets:
- Any financial account, including certain retirement and insurance plans, maintained by a foreign financial institution.
- To the extent held for investment and not held in a financial account, any stock or securities issued by someone that is not a U.S. person, any interest in a foreign entity, and any financial instrument or contract with an issuer or counterparty that is not a U.S. person.
U.S. taxpayers that have erroneously or willingly not disclosed such information to the governing agencies for all applicable years may also be subject to additional penalties. Effective July 1, 2014, the Department of Treasury has made significant changes to their Offshore Voluntary Disclosure Program (OVDP). Depending on the facts and circumstances, U.S. taxpayers may be subject to an additional penalty equal to 50% of the highest account balance during the periods under statute. If eligible, certain U.S. taxpayers can elect to enter the new Streamline OVDP and be subject to an additional penalty of 5% of the highest account balance. Entering into such programs may require additional, as well as amended, filings of various tax returns and forms.
The reporting threshold varies depending on whether an individual lives in the United States or files a joint income tax return with his or her spouse.
If you satisfy the "reporting threshold" that applies to you below, you are required to File Form 8938 with your income tax return.
- Unmarried taxpayers living in the U.S. - total value of your foreign financial assets exceeds $50,000 on the last day of the tax year or more than $75,000 at any time during the year.
- Married taxpayers filing a joint tax return & living in the U.S. - total value of your foreign financial assets exceeds $100,000 on the last day of the tax year or more than $150,000 at any time during the year.
- Married taxpayers filing separate tax returns & living in the U.S - total value of your foreign financial assets exceeds $50,000 on the last day of the tax year or more than $75,000 at any time during the year.
- Taxpayer living abroad (not filing a joint return) - if your tax home is in a foreign country, you meet one of the "presence abroad" tests below & the total value of your foreign financial assets exceeds $200,000 on the last day of the tax year or more than $300,000 at any time during the year.
- Taxpayer living abroad (filing a joint return) - if your tax home is in a foreign country, you meet one of the "presence abroad" tests below, and the total value of your foreign financial assets exceeds $400,000 on the last day of the tax year or more than $600,000 at any time during the year.
You satisfy the "presence abroad" test if you are one of the following:
- A U.S. citizen who has been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
- A U.S. citizen or resident who is present in a foreign country or countries at least 330 full days during any period of 12 consecutive months that ends in the tax year being reported.
The filing of Form 8938 does NOT relieve you of the requirement to file Form 114 (formally referred to as Form TD F 90-22.1), Report of Foreign Bank and Financial Accounts (FBAR), if you are otherwise required to file Form 114.
U.S. persons are ALSO required to file a Form 114 (formally referred to as Form TD F 90-22.1), Report of Foreign Bank and Financial Accounts, or FBAR each year if they have a financial interest in any financial account, including bank, securities or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year. Specified foreign financial assets are generally the same as those for purposes of Form 8938, with some exceptions.
In addition, a person who has signature authority over a foreign bank or financial account must also file Form 114. Accordingly, many U.S. companies that have control over their foreign subsidiaries will be required to file a Report. Form 114 does NOT get attached to your annual return and must be RECEIVED by the Department of Treasury on or before June 30th. This Form 114 must be submitted electronically to the Department of Treasury, either through their Financial Crimes Enforcement Network’s (FINCEN) BSA efile system or through a practitioner with the designated software.
The filing of Form 114 does NOT relieve you of the requirement to file Form 8938, Statement of Specified Foreign Financial Assets, if you are otherwise required to file Form 8938.
Under the same changes to the Department of Treasury’s Offshore Voluntary Disclosure Program, U.S. taxpayers who are not in compliance with all FBAR filings could face additional penalties of up to 50% of the highest aggregate account balance during a six year period (if applicable.
*** Please contact Feeley & Driscoll's Boston Accounting team by email or call 1 (888) 875-9770 to assist you in determining whether you would be required to comply with the new FATCA regulations.
Updated August 2014
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