Foreign Account Tax Compliance Act (FATCA)
Taxpayers have long been required by the Bank Secrecy Act to report certain foreign accounts. Now, there is a new reporting requirement in the Foreign Account Tax Compliance Act of 2010. Since tax years starting after March 18, 2010, however, the IRS has required certain taxpayers to report their specified foreign financial assets in which they have an interest. For most individual taxpayers, this means reporting by filing new Form 8938, Statement of Specified Foreign Financial Assets, along with their annual income tax return. This annual foreign-asset disclosure to the IRS is in addition to any reporting requirement to the Treasury Department under the Bank Secrecy Act using the so-called “FBAR” form. The new reporting requirement is significant and is expected to impact many taxpayers.
Who must file Form 8938?
Form 8938 must be filed by “specified individuals” with “specified foreign financial assets.” A specified individual is a U.S. citizen; a resident alien of the U.S. for any part of the tax year; a nonresident alien who makes an election to be treated as resident alien for purposes of filing a joint income tax return; or a nonresident alien who is a bona fide resident of American Samoa or Puerto Rico.
The IRS also reported that in the future it intends to require specified domestic entities to file Form 8938 if the entity is formed or availed of to hold specified foreign financial assets, and the value of those assets exceeds the appropriate reporting threshold. The IRS has issued proposed regulations which provide that specified domestic entities include certain domestic corporations, domestic partnerships, and trusts. At this time, there is no Form 8938 filing requirement for specified domestic entities. More guidance about specified domestic entities is being developed by the IRS.
Reporting Obligations by U.S. Individuals and Entities:
The IRS has developed monetary thresholds for reporting. The thresholds vary depending on the taxpayer’s status.
While Living in the United States:
a) Single
Value of Foreign Financial Assets at End of Year in the tax year – $50,000
Value of Foreign Financial Assets ANY time – $75,000
b) Married Filing Jointly
Value of Foreign Financial Assets at End of Year in the tax year – $100,000
Value of Foreign Financial Assets ANY time – $150,000
c) Married filing separately
Value of Foreign Financial Assets at End of Year in the tax year – $50,000
Value of Foreign Financial Assets ANY time – $75,000
While Living Abroad:
d) Not filing joint return
Value of Foreign Financial Assets at End of Year in the tax year – $200,000
Value of Foreign Financial Assets ANY time – $300,000
e) Filing joint return
Value of Foreign Financial Assets at End of Year in the tax year – $400,000
Value of Foreign Financial Assets ANY time – $600,000
International cooperation
After Congress passed FATCA, the U.S. Treasury began discussing the new reporting and disclosure requirements with foreign governments, especially Canada, France, Germany, Italy, Spain, and the United Kingdom. From these discussions, model intergovernmental agreements (so-called Model IGAs) has been developed to facilitate government-to-government implementation of FATCA. To finalize additional IGAs before implementation of mandatory 30 percent U.S. withholding on all foreign financial institutions that do not disclose the names of U.S. depositors, the Treasury Department announced in July 2013 a six-month delay in mandatory withholding, from January 1, 2014 to July 1, 2014. The U.S. hopes to expand FATCA implementation of its Model IGA to many other countries within that timeline This delay does not postpone any Form 8938 reporting responsibilities required of individuals holding foreign accounts.
Penalties
Penalties for noncompliance with FATCA can be substantial. There is a failure to file (Form 8938) penalty of $10,000 and an additional penalty of up to $50,000 for continued failure to file after notification by the IRS. However, a taxpayer may avoid a penalty if failure is due to reasonable cause and not willful neglect. In addition, penalties for underpayment and fraud may apply as well as criminal penalties.