With the world growing ever more connected the opportunities for individuals and small businesses to participate in the global economy are expanding rapidly. I speak with clients every week who have invested into real property outside of the United States or who are doing business with foreign partners or clients. While some concerns about doing business outside the USA are easily recognized (such as currency exchange rates) other important issues that you should be thinking about remain behind the proverbial curtain. This article will shed some light on key reporting rules under FATCA for US taxpayers with international investments.
What is FATCA?
So, what is FATCA and when should you be paying attention to it? The abbreviation FATCA stands for the “Foreign Account Tax Compliance Act” which became law in the United States in 2010. One of the purposes of FATCA was to increase the visibility of the worldwide holdings of US taxpayers. Under FATCA foreign financial institutions and individuals have increased reporting requirements to the IRS and the Department of the Treasury (through FinCEN). This means that if an individual fails to report foreign holdings or income, the IRS may still come knocking, based on information obtained from your financial institution and the penalties for FATCA violations are significant.
Who Do the Rules Apply To?
So, who do the FATCA rules apply to? It is a larger group than you might think, and includes persons living in the U.S. with non-U.S. assets (whether citizens or resident aliens), as well as, persons living outside the U.S. (expats) with the necessary connection to the U.S. It may also affect non-U.S. business partners or shareholders who share accounts with “U.S. persons” under the tax rules. If you belong to this group and have foreign assets, investments, or bank accounts then you have FATCA reporting obligations to the United States Government.
What are the reporting requirements?
Individuals for which the rules apply are required to self-report their foreign assets every year. In addition, foreign financial institutions, including banks, brokers, and certain insurance companies, are required to report asset and identity information for any suspected U.S. person (which may be triggered by things such as your birthplace, prior residency within the United States, a U.S. address or phone number and routine payments to a U.S. based account). This dual reporting requirement allows for the cross-checking of information to facilitate enforcement.
How do you report foreign holdings? Well, if you have foreign bank accounts whose aggregate value exceeds $10,000, you will need to complete the Report of Foreign Bank and Financial Accounts Report (commonly known as the “FBAR” on FinCEN form 114). In addition, you may need to file a form 8938 with the IRS. Form 8938 is generally required if your foreign assets exceed specific thresholds. For a single person those thresholds are foreign assets in excess of $50,000 if living within the US and $200,000 if you are living abroad. For persons who are married and filing jointly these thresholds double to $100,000 and $400,000 respectively. You may be exempt from filing the 8938 if you have reported the foreign assets on other forms.
Each of these forms is filed annually for so long as you meet the applicable criteria. The reporting deadline for the FBAR is April 15th for the prior year and it may be filed electronically through FinCEN’s e-filing system. Form 8938 is due to the IRS with the filing of your federal return. These extra FATCA forms are in addition to complying with the standard income tax reporting for the U.S. and the local jurisdiction where the assets are held.
Why Is This Important?
So why do you care about timely filing your 8938 & FBAR forms? The penalties for not filing add up fast. For example, failure to file a Form 8938 may carry a penalty in the amount of $10,000 for the initial failure to file, an additional penalty of up to $50,000 for continued failure to file, and finally, a 40% penalty on any understatement of tax attributable to the non-disclosed foreign assets. As if the penalties weren’t bad enough, the statute of limitations for the IRS to audit and assess penalties on your entire tax return may be extended for certain failures to report. Not filing an FBAR has similar high penalties including the greater of $100,000 or 50% of the amount in question for each violation and has the added threat of potential criminal violations (yes, that’s jail time folks).
If you are about purchase your first foreign rental, or you are expanding your start-up outside of the U.S., make sure that you plan for these additional reporting requirements and have the right tax and legal advisors who know about these forms and how they should be completed. If you believe you are out of compliance, there are ways to get into compliance (a much longer article), but you should consult with your tax and legal advisors sooner than later.