The federal government devotes extensive time and resources to ensure that American taxpayers with foreign holdings pay appropriate taxes on these accounts. The Foreign Account Tax Compliance Act (FATCA) is one of the primary laws in this field. FATCA imposes many responsibilities on individual and business taxpayers with foreign holdings.
Perhaps most importantly, taxpayers who meet the FATCA threshold must file a Statement of Specified Foreign Financial Assets, known as Form 8938, along with their tax return. Taxpayers with foreign accounts must also file Form 114, the Report of Foreign Bank and Financial Accounts (FBAR). Failure to file either or both of these documents can bring on severe financial consequences. We will go into greater detail about various aspects of FATCA below.
What is the FATCA threshold?
The reporting threshold for FATCA differs based on whether a taxpayer files his or her return separately or jointly, and whether he or she lives in the United States or abroad. The following thresholds apply to American citizens who live in the United States.
- For single taxpayers, or taxpayers filing a separate tax return, the FATCA threshold is $50,000 on the final day of the tax year, or $75,000 at any point in the year.
- For joint filers living in the United States, the FATCA reporting threshold triggers at $100,000 for the last tax day, or if accounts were valued at $150,000 at any point in the year.
Thresholds are higher for individual and married taxpayers who live abroad. The IRS defines living abroad as defined as American citizens who consider their "tax home" to be another country and have lived outside the United States in 330 days over 12 consecutive months.
- For single American citizens living abroad, the FATCA threshold is $200,000 on the final tax day of the year OR if foreign accounts reach $300,000 at any point.
- This threshold doubles to $400,000 and $600,000 respectively for married couples. It is not necessary for both spouses to live abroad.
Any taxpayers meeting these descriptions are required to file a completed Form 8938 along with their tax return each year.
What types of assets are considered "foreign financial assets"?
Taxpayers must report any foreign financial accounts or any foreign investment assets meeting the FATCA threshold. The IRS excludes the following assets from FATCA reporting:
- Any financial account maintained by a U.S. bank. Therefore, accounts held in foreign branches of American banks need not be reported.
- Foreign equivalents of social security or related foreign government programs.
- Gifts from foreign accounts or trusts that are already reported under IRS Form 3520.
What happens to taxpayers who fail to comply with FATCA?
Failure to file Form 8938 can bring on significant financial penalties. Taxpayers meeting the FATCA threshold who fail to file Form 8938 are subject to a $10,000 fine. The IRS could penalize a taxpayer an additional $50,000 if he or she does not file after receiving notification from the IRS. Even worse, the IRS can issue a 40 percent penalty on underreported assets.
Skilled legal counsel can make all the difference
Considering the complexities of these issues, foreign account holders need to strongly consider working with attorneys who have a comprehensive understanding of these issues. Based in Manhattan and serving a global clientele, the lawyers of Goldburd McCone deliver exceptional representation in all areas of international tax law.