But what exactly is FATCA, and how might it affect you? Read on below for a primer.

What is FATCA?

FATCA is a 2010 law that requires all foreign financial institutions to disclose American account holder information to the US government in an effort to make it easier to identify and discourage tax evasion.

Is FATCA just for banks?

Beyond requiring foreign financial institutions to share information on American account holders, FATCA also requires Americans with a certain amount of assets in foreign financial accounts to report them on Form 8938 — so it affects taxpayers as well.

Read more: The Top 8 Things You Need To Know About FATCA

What are the filing thresholds for FATCA & Form 8938?

FATCA compels Americans residing within the US to file Form 8938 if they own $50,000 or more in foreign financial accounts. For Americans abroad, however, the reporting threshold is significantly higher. Expats must file Form 8938 only if their foreign financial assets exceed $200,000 on the last day of the tax year, or over $300,000 at any point during. This threshold doubles for jointly-filing, married couples to $400,000 on the last day of the year, or over $600,000 at any point during.

What does the Bank Secrecy Act of 1970 have to do with FATCA?

The Bank Secrecy Act of 1970 was passed by Congress as part of an effort to fight money laundering. The law requires financial institutions to keep thorough records, file reports, and report any suspicious activity that could indicate money laundering, tax evasion, or other financial crimes. It also requires Americans with $10,000 or more in foreign financial accounts to file a Report of Foreign Bank and Financial Accounts (FBAR) each year via FinCEN Form 114.

While FATCA wasn’t created as part of the Bank Secrecy Act of 1970, it did build upon the goal of deterring financial crime and boosting tax compliance by making it easier for the US government to monitor and investigate foreign financial accounts.

Read more: FinCEN Form 114 Vs IRS Form 8938 – What Expats Need To Know

How does the IRS enforce FATCA today?

With the information provided by foreign financial institutions, the federal government is able to identify which Americans meet the Form 8938 threshold. If somebody is obligated to file it but fails to, they’re subject to a $10,000 penalty which can reach up to $50,000 if they continue to withhold payment after notification by the IRS. Americans facing a non-compliance charge may also be subject to a penalty of 40% if they underreport their assets thereby paying less than they are obligated to.

FATCA: Frequently Asked Questions

Want to learn more about FATCA? Find out the answers to some of the most frequently-asked questions below.

What’s the difference between FATCA and FBAR?

FBAR refers to a specific report that American taxpayers who meet the threshold must file, which was created as a result of the Bank Secrecy Act of 1970. FATCA, on the other hand, refers to an entire law — one that is separate from the Bank Secrecy Act of 1970.

How to stay compliant with FATCA as an expat?

Any American living abroad who meets the reporting threshold must file Form 8938 and include it along with their annual tax return. 

What needs to be included when declaring FATCA?

Form 8938 has six different sections that must be completed:

• Section I – Foreign Deposit and Custodial Accounts Summary: Detail the number of foreign financial accounts (both deposit and custodial) that you hold, along with their value, and whether any were closed during the tax year
• Section II – Other Foreign Assets Summary: Report any other foreign assets you hold that are not either deposit or custodial accounts
• Section III – Summary of Tax Items Attributable to Specified Foreign Financial Assets: Report the interest, dividends, royalties, other income, gains and losses, deductions, and credits related to your foreign financial accounts
• Section IV – Excepted Specified Foreign Financial Assets: Indicate whether you have already reported specified foreign financial assets on a different form or forms within your tax filing
• Section V – Detailed Information for Each Foreign Deposit and Custodial Account Included in the Part I Summary: Provide information on your foreign financial accounts like the financial institution name, type of account, account number, and more
• Section VI – Detailed Information for Each “Other Foreign Asset” Included in the Part II Summary: Provide information on other foreign financial assets like asset type, maximum value, mailing address associated with it, and more

Form 8938 can be confusing, so if you have any doubts, don’t hesitate to contact a Bright!Tax expat-tax specialist.

How do I become compliant with FATCA?

If you were supposed to file Form 8938 in a previous year and didn’t, you may be able to catch up penalty-free through the IRS Streamlined Procedure. To qualify for this program, you must:

• Have a Taxpayer ID number (usually your Social Security Number)
• Not yet have been contacted by the IRS regarding a missing return or form
• Attest that your failure to file was not intentional

The Streamlined Procedure requires you to file:

• Your last three tax returns
• Your last six years of FBARs (if you met the threshold)
• Form 14653

Read more: Get Caught Up With The Streamlined Procedure — How To File Form 14653

The Best Way to Ensure You’re in the Clear With FATCA

US tax requirements are complex, frequently-changing, and enforced more tenaciously than ever. Any mistakes, late submissions, or missed tax exemptions can cost you significantly – even if they were unintentional. 

To get your taxes in on time with minimal effort on your part and maximized tax exemptions, consider an expat US-tax filing service like Bright!Tax. Whether you need someone to file your taxes, answer your questions, or help you with tax planning strategies, we’re here to help.

Get started today and one of our tax specialists will reach out regarding next steps as soon as possible.

The post <strong>FATCA Enforcement: What US Expats Need to Know </strong> appeared first on Bright!Tax Expat Tax Services.

If you’re like many taxpayers with accounts or other financial activities abroad, you’d want to know whether FATCA applies to you so you can file the forms and reports necessary to stay in the good graces of the IRS. 

Tax compliance can be tricky. International tax compliance can be daunting. 

But you may be exempt from FATCA reporting requirements if you own one of these exempt assets outside the US. 

A financial account held by a US payor

Financial accounts held by a US payor are exempt from FATCA reporting requirements.

But what does that mean?  Who or what is a US payor? 

For digital nomads and US expats, the IRS defines a US payor as:

• 🏦 a US branch of a foreign financial institution and
• 🌍 a foreign branch of a US financial institution

An example of a US branch of a foreign financial institution would be Credit Suisse AG’s San Francisco branch.

On the other hand, an example of a foreign branch of a US financial institution would be a branch of a US bank, such as Bank of America. However, it’s challenging to find a real-life example of this. Banks overseas are typically registered overseas, despite the fact that their name might imply they’re US based (as is the case with Bank of America). 

Read more: Why are banks closing US expats’ accounts

According to FATCA, financial institutions aren’t limited to depository institutions like banks. That being said, they may be the most common. It also includes custodial institutions and investment entities which all fall under the broad meaning of a financial institution.

A beneficial interest in a foreign trust or a foreign estate (but with one condition)

You may be exempt from FATCA if you have a beneficial interest in what the IRS recognizes as a foreign trust or a foreign estate. 

However, ownership of a foreign trust or foreign estate is, unfortunately, not a get-out-of-jail-free card.  There’s a very specific condition to meet the exemption. 

You must be unaware and have no knowledge of your interest in the foreign trust or foreign estate. That would likely mean you’ve never received any notifications or income payments from the estate or trust. 

But if you receive a distribution from your foreign trust or foreign estate, you’re immediately deemed to be aware of your beneficial interest. And the IRS won’t believe any claims of not knowing. And this is where FATCA reels you in and subjects you to its reporting requirements.

An interest in the social security, social insurance, or another similar program of a foreign government

If you have an investment interest in the social security, social insurance, or a foreign government program of a similar nature, you’ll not have to report such investments under FATCA’s regulations.

The key here is that such an investment has to be through a government program. Think of the US Social Security program as an example. 

Naturally, this excludes investments in social security enterprises that are privately owned. It also excludes other non-US retirement or medical schemes.

Important to note: Many Americans working overseas are legally required to pay into government social security programs in some countries. This required participation remains exempt from FATCA reporting.

Here are FATCA’s other exemptions

Aside from the exemptions we’ve highlighted above, there are other instances when an American taxpayer may also be exempt from FATCA reporting. 

If you’ve already reported specified foreign financial assets on other IRS forms, there’s no need to report them a second time on Form 8938. 

Here are some examples of specified foreign financial assets you may have already reported when filing your tax return-

• Foreign corporations reported on Form 5471
• Foreign partnerships reported on Form 8865
• Trusts and foreign gifts reported on Form 3520 or Form 3520-A (filed by the trust), and
• Passive foreign investment companies reported on Form 8621

Read more: Understanding Form 5471

Based on reporting thresholds as well as the exemptions we’ve described, although you may not need to file your FATCA Form 8938, that doesn’t exempt you from annually filing an FBAR (Foreign Bank Account Report), also known as Form 114, with the US Treasury’s Financial Crimes Enforcement Network (FinCEN).

Read more: How to file the FBAR

Finally, there are other FATCA exemptions for certain trusts and certain assets held by bona fide residents of US territories, including Puerto Rico, Guam, and the US Virgin Islands.

How to value foreign financial assets

If your non-US assets don’t meet the FATCA exemption requirements, you’ll need to know how to value them when filing your US tax return each year.

In short, the IRS recommends the fair value method. This refers to the price you would sell the asset for on the open market. Generally, your account statement will do the trick to provide the value you must report on Form 8938. 

❓ What do you do if you don’t know the value of your foreign asset because it isn’t commonly traded? 

In that case, you’ll need an independent third-party appraisal or valuation. 

❓ But what about assets held in a foreign currency?

In this case, the IRS expects taxpayers to convert the value to USD using the Treasury Department’s Bureau of the Fiscal Service. If you don’t use the Treasury’s rates, you should disclose the source of the exchange rate you use on Form 8938.

What should I do next?

Take these quick steps now if you’re a US taxpayer living abroad:

1. Review all your non-US financial assets for any of the allowable exemptions.
2. Read our Ultimate FATCA Guide for Expats.
3. If you have non-exempt assets that need to be reported to the IRS, contact us! Our CPAs are here for you to discuss your options. Whether you’re doing this year’s tax return or you’re catching up, we love helping expats with their US taxes.

The post Do You Qualify for a FATCA Exemption? appeared first on Bright!Tax Expat Tax Services.

In this article, we reveal eight crucial things you need to know about FATCA.

Let’s dive in.

1. FATCA is different from FBAR

Here’s how they are different:

FBAR 

The Report of Foreign Bank and Financial Accounts (FBAR) requires individuals whose foreign bank account balances, either individually or in aggregate, total $10,000 or more to file form FinCEN 114 with the office of Financial Crimes Enforcement Network (FinCEN).

FATCA

FATCA reporting is more comprehensive. It requires US citizens who hold certain specified foreign financial assets (cash, investments, pensions, etc.) to report those assets to the IRS with their annual tax returns.

Under FATCA, the obligation to report financial assets outside the US’s borders—depends on your country of residence and whether you’re filing as a married person. 

If you’re single and living outside the US and your foreign assets are greater than $200,000 on December 31 (or more than $300,000 at any time during the tax year), you’ll need to report them on Form 8938, Statement of Specified Foreign Financial Assets. These thresholds are doubled if you’re married and filing a joint return.

NOTE: Filing one form doesn’t exempt you from filing the other!

The IRS has a helpful table that points out the differences between these two forms.

Read more: FINCEN 114 vs. IRS 8938

2. The accounts or assets you should report

Not all foreign accounts or assets require reporting under FATCA! You should report only certain specified financial accounts or assets. But what does that mean? 

According to the IRS, these generally include foreign bank accounts and foreign intangible assets you’re holding for investment. 

Assets you directly hold in your house, such as art collections and jewelry, do not need to be reported. They are also not taken into account when determining your reporting threshold.  

As a safe rule of thumb, assets that you directly hold do not qualify as reportable assets. This is true whether they are held for investments or not. It’s why real estate properties, such as rental houses, only qualify as reportable assets if owned by another entity – say a corporation, trust, or estate.

The IRS has another helpful table outlining which assets qualify. 

3. Foreign banks are reporting you to the IRS

Here’s how this works. Under FATCA, foreign banks and other financial institutions have to register with the IRS and commit to providing financial information on their American clients. 

Financial institutions that don’t register with the IRS and commit to this kind of disclosure are subjected to a 30% withholding tax should they receive payments from the US.  

Here’s how this might affect you.

Some financial institutions view this as an unnecessary burden that comes with costs, if not in money, in time. 

As a result, to avoid this extra work, they choose not to deal with American citizens or, at best, limit their dealings.

Here’s what follows.

Having a foreign bank account may be difficult for a US citizen.

Read more: Holding a Foreign Bank Account as a US Expat

4. FATCA doesn’t only apply to Americans living abroad

This is worth repeating because many people think FATCA only applies to American expatriates. 

The truth is, FATCA is not about residence. It is about foreign bank accounts and foreign financial assets, regardless of where you reside.

Of course, residence plays a role in establishing the threshold to determine whether you should file Form 8938.

For instance, compared to Americans abroad, American residents have a lower FATCA threshold: $50,000 for single American residents compared to $200,000 for their counterparts abroad.

For those who are married, American residents will be subjected to FATCA regulations if their joint financial assets total at least $100,000. For couples abroad, the minimum amount is $400,000.

5. FATCA doesn’t only apply to individual taxpayers

Aside from individual taxpayers, FATCA applies to certain corporate entities as well, including:

• – US-registered corporations
• – US-registered partnerships
• – US-registered trusts

Read more: IRS FATCA Summary

6. Non-compliance can be expensive

Failing to comply with FATCA regulations can be costly.

For instance, failure to file Form 8938 may mean you part with $10,000 in penalties to the IRS. And then, if you’ve been notified by the IRS of your failure to file Form 8938 and still have not taken action, you may pay an additional penalty of up to $50,000.

That’s $60,000 in penalties for failing to submit a tax form – just under the average annual income in the U.S. 

7. You can legally opt out of FATCA. But it’s pricey.

Yes, you can opt-out of FATCA. And not just FATCA. But all tax laws in the US. 

And that’s by renouncing your citizenship. 

That’s what Daniel Kuettel, an American veteran who couldn’t open a bank account in Switzerland because of FATCA regulations, did.

But it doesn’t come cheap. Or easy. When you go you’ll be required to pay a non-waivable fee of $2,350 to the US embassy. 

And here’s the catch. This amount is not refundable—even if your request to give up your passport is denied.

And beyond the money, there are legal requirements, a possible exit tax, and an elaborate process that goes with it.

Read more: Renouncing US Citizenship, Everything You Need To Know

8. Examine your cryptocurrency

If your crypto exchange isn’t based in the US and you meet the reporting thresholds, congratulations! You may have just triggered FATCA reporting requirements. Unfortunately the IRS has not yet formally taken a position on whether cryptocurrency is required to be reported on Form 8938, but when it comes to the IRS, you’re better safe than sorry.

Many tax professionals will recommend that you’ll need to complete Form 8938 like you would if you held traditional currency in a foreign bank.  

So, if you’re trading in cryptocurrency, this is something to keep in mind.

What should I do next?

Here’s a quick snapshot of what your next steps should look like as a US taxpayer abroad… 

1. Review your financial accounts outside the US. 
   • – Taxpayers who are unmarried or filing separately from your spouse: Calculate the total value of assets to see if they exceeded $300,000 at any time during the year or $200,000 at the end of the year
   • – Taxpayers filing jointly with your spouse: Calculate the total value of assets to see if they exceeded $600,000 at any time during the year.
2. If total assets are close to or exceed the reporting thresholds shown above, contact us to speak with an expert CPA. We’re eager to help!

The post The Top 8 Things You Need To Know About FATCA appeared first on Bright!Tax Expat Tax Services.

Beyond finding a new place to live, the move may involve adapting to a new culture, building a new social or professional network, and in some instances, opening a foreign bank account to manage your finances while abroad. 

Opening a foreign bank account isn’t a straightforward process for US expats, however. And depending on the amount of assets you hold in your foreign accounts, you may have to declare them to the US Treasury each year. 

Today’s article hopes to shed some light on these requirements! Here’s what you’ll learn:

• Why do US expats face challenges when opening a foreign account?
  • What is FACTA? 
• So you already have a foreign bank account… What is the FBAR, and who needs to file
  • What does the IRS consider to be foreign accounts? 
  • What are the penalties for not filing the FBAR? 
  • And perhaps most importantly… What do I do if I’ve never filed an FBAR before? 

Why do US expats face challenges when opening a foreign account?

To begin, all US expats must declare their worldwide income and (sometimes) foreign accounts to the IRS regardless of where they live. This is because the US is one of the few countries in the world (alongside Eritrea) that applies citizenship-based taxation.

Citizenship-based taxation is nothing new. In fact, it dates back to the Civil War. It’s the tax model under which people have to pay (or report) their income as a result of their citizenship with a country – regardless of whether they reside there. 

The interesting thing is that for many years, the IRS had no accurate way of tracking the financial activities of American expats. 

All of that changed, however, in 2010 with the introduction of the Foreign Account Tax Compliance Act (in other words, FATCA). 

What is FATCA? 

As someone who lives abroad, you may think to yourself, what’s the point of filing a return? How will the IRS know that I live overseas anyway?

Compliance became especially important when Congress passed the Foreign Account Tax Compliance Act (FATCA) in 2010. Under this Act, international banks in every country worldwide are now obligated to report the financial activities of their US clients to the IRS. 

One unintended consequence of this change, however, is that foreign financial institutions have become hesitant to accept American clients. Instead, some turn Americans away in an effort to avoid these additional reporting requirements. 

So you already have a foreign bank account… Who needs to file the FBAR 

The Report of Foreign Bank and Financial Accounts (FBAR) is a document you may need to file (using FinCen Form 114) to declare open accounts you hold overseas. The goal of the FBAR is to fight tax evasion and to take a measure of the maximum balances US expats hold in foreign accounts. 

The IRS specifies that if you meet the following criteria, you must file an FBAR:

• You hold at least one foreign account overseas that you have a financial interest in or signature authority over. 
• You hold $10,000 or more across your foreign accounts combined. 

Let’s break these down a bit further. 

The IRS determines financial interest based on who’s the owner of a record or legal title. On the other hand, a person with signature authority controls the disbursement of money or other property in the account using their signature. 

The deadline for filing the FBAR is on April 15th of each year. However, those who fail to file by the deadline receive an automatic extension to October 15th when filing Form 114. 

What does the IRS consider to be foreign accounts? 

Here are a few examples of accounts (outside the US) that the IRS classifies as foreign accounts:

• Bank accounts
• Foreign investment funds
• Retirement accounts

That being said, you don’t have to declare your foreign accounts if they fall into the following categories:

• Accounts owned by a governmental entity or international financial institution
• Accounts maintained in a US military banking facility
• Accounts held in an individual retirement account (IRA) in which you’re an owner or beneficiary  

What are the penalties for not filing the FBAR? 

The penalties for not filing the FBAR when you’re required to do so will depend on a few factors. Whether you willfully or non-willfully avoided filing will have a big influence. If you avoided filing the FBAR willfully, then the penalty will be much higher.

The penalty for non-willful non-compliance starts at $10,000 for each missed tax year. Willful non-compliance will come at a heftier price, sometimes up to hundreds of thousands of dollars: the IRS may charge you $100,000 or 50% of the balance in your foreign account. 

The amount of funds in your foreign account will also impact potential penalties. Just reaching the $10,000 threshold for filing versus holding tens of millions of dollars in unreported foreign accounts will impact the penalties the US Treasury may assess. 

Read More: Understanding FBAR Penalties

What do I do if I’ve never filed an FBAR before? 

Now, let’s say that you’re an expat who’s been living overseas for quite some time, and you hold more than $10,000 across several foreign bank accounts. If the first time you learned about your FBAR tax obligations is right now, the penalties we just described likely feel like an overwhelming possibility. 

However, let’s say it’s been years since you left the US, and the IRS hasn’t contacted you yet. Does that mean that you’re still likely to run into financial trouble? No, it does not, as the IRS offers a few ways of getting back up to speed with your filing obligations with a reduced (or no) risk of a penalty. 

To get started with the Delinquent FBAR Procedure, you need to file a statement that explains why you’re filing the FBAR late. As you file the form electronically, you’ll have to select a reason for filing late on the cover page of the form.

On the other hand, for those who have missed both tax returns and FBAR filing, the IRS has a Streamlined Filing Compliance Procedures program that allows US expats who live outside of the US to catch up without penalties. To qualify for the Streamlined Filing Compliance Procedures, you’ll need to:

• File your last 3 federal tax returns
• File your last 6 FBARs 
• Pay any taxes & related interest you have due
• Certify that your noncompliance was non-willful

Don’t Forget About Your US Tax Obligations While Overseas

It’s one thing to familiarize yourself with all the rules and regulations to remain IRS compliant. But if you feel like understanding and filing all the necessary paperwork is more trouble than it’s worth, or you’d like to be sure you’re doing things right the first time, you might consider seeking the help of a US tax advisor to eliminate stress and focus instead on things that are more important to you.

The post Holding a Foreign Bank Account as a US Expat: What You Need to Know appeared first on Bright!Tax Expat Tax Services.

Only in the last decade has this had any real impact on Americans living abroad. The Foreign Account Tax Compliance Act was introduced in 2010 to fight tax evasion and promote voluntary compliance with tax laws. Foreign financial institutions & investment firms are now required to report the account balances & contact details of their US account holders to the IRS.

Up until this point, the US has enforced FATCA reporting by imposing withholdings on foreign financial institutions (FFIs) that don’t act in accordance when they trade in US financial markets. However, a recent report by the Treasury Inspector General for Tax Administration reports these FFIs have gone so far as to freeze and close US citizen’s accounts considering FATCA compliance too big a liability. The punch line: FATCA has created unintended challenges for American Expats across the globe.

Now let’s dig into the updates…

Get a little, give a little: Respecting reciprocal reporting

FATCA was always intended to be reciprocal – an equal handoff between foreign governments and the US. Intention hasn’t translated to action, however. Foreign countries have been providing the US with this information since 2014, but these efforts have been one-sided.

While IRS Commissioner Retigg believes in “transparency where transparency is appropriate,” he elaborated. “We are forced to make difficult decisions regarding priorities, the types of enforcement actions we employ, and the service we offer.” Limited resources and pushback from the American Banking community (which has already rejected a homeland version of FATCA), make reciprocal reporting seem unlikely anytime soon.

Hesitation for the US to ‘give what they’re getting’ may ultimately stir up additional unintended consequences. Some worry other nations could hide their wealth in the US without fear of it being discovered by tax authorities in their home countries.

In the meantime, more than 100 countries (not including the US) have started incorporating a separate solution. Common Reporting Standard (CRS), like FATCA, works to fight against tax evasion and protect the integrity of tax systems by sharing relevant taxpayers’ information across country lines.

Plot twist – FATCA enforcement currently falls short 

Thus far, the IRS has spent $573 million on FACTA enforcement as of 2020. Very few American expats filed their US tax returns annually before 2010 (when FATCA was introduced). At the time, there was no real way for the IRS to know if its citizens had foreign generated income.

The newest TIGTA report suggests the IRS still has low visibility of its citizens’ foreign income and compliance. Commissioner Charles Rettig confirmed this in a committee setting, saying: 

“Congress enacted FATCA in 2010, but we have yet to receive any significant funding appropriation for its implementation. This situation is compounded by the fact that when we do detect potential non-compliance or fraudulent behavior through manually generated FATCA reports, we seldom have sufficient funding to pursue the information and ensure proper compliance.”

Let’s take a closer look at the numbers. When FATCA was implemented, it was estimated to bring in $8.7 billion in revenue over the next 10 years. Although total revenues tied to the legislation are unclear, the IRS has collected less than $14 million over the last 12 years. The discrepancy has placed additional pressure on the IRS to bring efficiencies & structure to their roadmap. 

You have (some) time. Take advantage of it!

This pressure is expected to spark action. Already, the IRS has agreed to the work the following key recommendations from TITGA into their compliance campaigns: 

1. “Establishing follow-up procedures and initiating action on error notices with the FFIs
2. Continuing efforts to systemically match Form 8966 and Form 8938 data to identify nonfilers and underreporting related to U.S. holders of foreign accounts and to the FFIs
3. Informing taxpayers how to obtain global intermediary identification numbers
4. Strengthening overall compliance efforts directed toward improving the accuracy of reporting by Form 1042-S filers.”

With this in mind – non-compliant expats should get caught up now!

If you are a US person and you’re behind on your US tax filing, there’s a safe path to compliance. Under the Streamlined Procedure, expats can claim IRS exemptions that reduce their US tax liability, in most cases to zero. Expats who file US taxes late under the program don’t face any penalties. They must do so voluntarily before the IRS contacts them, however!

Be sure to beat the IRS to it! 

The post FATCA Update – IRS Struggling With Volume, Reciprocal FATCA Plans appeared first on Bright!Tax Expat Tax Services.

Some context: The Foreign Account Tax Compliance Act (FATCA), is a law passed by US Congress in 2010 to help deter financial crime, boost tax compliance, and address offshore tax evasion. The law came into effect on July 1st, 2014, and is meant to build on the work of the Bank Secrecy Act of 1970. However, there have been several unintended consequences of the legislation, particularly for expats.

What is FATCA (Foreign Account Tax Compliance Act) to expats?

There are two key aspects of FATCA that affect US expats: 

1. It requires individuals with financial assets abroad to report them when they file their federal tax returns.
2. It requires foreign financial institutions (FFIs) including banks and investment firms to report their US account holders, allowing the IRS an effective method of monitoring expats’ foreign registered accounts.

How the IRS finds out about foreign accounts

Under FATCA, foreign financial institutions have to register with the IRS and commit to reporting the financial information of their American clients. 

FFIs that don’t register with the IRS and commit to this kind of disclosure are subjected to a hefty 30% withholding tax should they receive payments from the US, along with a possible ban from trading in the American money markets. 

Understandably, this penalty is quite effective in gaining cooperation from foreign financial institutions. However, some banks have resolved their obligation by refusing to service American clients (which of course only increases the challenges of the US taxpayer abroad). 

At this point, you may be wondering how the US can have such a powerful global reach – and you are not alone if you feel this is an overreach. In fact, the US’s dominant position in global financial markets allows the US to oblige foreign financial institutions to cooperate with its tax compliance initiatives. As a US taxpayer, it’s in your best interest to research carefully to fully understand the potential implications of FATCA for you. 

Expat overview: Understanding who qualifies as a US taxpayer

Unique among the vast majority of the world, the US utilizes a citizenship-based model of taxation. This means that if you hold a US passport or Green Card, you are required to file an annual tax return with the IRS – even if you reside outside of the United States. Most other countries use a residence-based model, meaning that where you reside is where you pay your taxes. The US’s model can make living abroad and staying US tax compliant extremely challenging, and perhaps no other group is as implicated as a group of American passport holders known as Accidental Americans. 

Accidental Americans and the US tax filing requirement

Accidental Americans are effectively foreigners born in the US who grew up abroad. They may also have been born abroad to a US parent who claimed US citizenship for them when they were a baby. Many have never lived in the US, and a common sentiment shared among Accidental Americans is that they do not even consider themselves Americans. So, you can imagine the frustration when they enter adulthood and encounter banking difficulties in their day-to-day lives as a result of their US citizenship. 

How FATCA unfairly implicates Accidental Americans

Because foreign banks and other financial institutions have to register with the IRS and provide financial information on their American clients, Accidental Americans are subject to providing the same identification documents as born-and-raised Americans, such as providing a Social Security Number. The catch here is that oftentimes, Accidental Americans simply don’t have one. This causes an impasse between them and their bank, often resulting in the freezing or outright closure of their account. This in turn may lead to problems with buying a house or accessing banking or credit facilities for their business. 

Moreover, many people learn that they are behind on filing US taxes at the same time they learn of their banking difficulties. This creates a hugely stressful and frustrating situation that requires time, effort, and, often, money to rectify. Fortunately, there is a strong and vocal community¹ that Accidental Americans can join for support and guidance. (We also discuss how you can catch up on your US taxes penalty-free further down.)

Read more: Are You an Accidental American? Learn How to Avoid Double Taxation and Penalties

Reporting foreign assets carries no additional tax implications; at its core, it’s an administrative exercise

Of note: The reporting threshold is significantly higher for expats than for Americans residing within the US. Expats must file Form 8938 only if their foreign financial assets exceed $200,000 on the last day of the tax year, or over $300,000 at any point during. This threshold doubles for jointly-filing, married couples to $400,000 on the last day of the year, or over $600,000 at any point during. 

Beyond requiring foreign financial institutions to share information on American account holders, FATCA also requires Americans with a certain amount of assets in foreign financial accounts to report them on Form 8938. So, it affects taxpayers as well.

Below are a couple of tables to help you visualize the difference in filing thresholds. Kindly refer to the one with the title that describes your situation (US expat or US resident).

Form 8938 Filing Thresholds for US expats (living outside the US)

Form 8938 Filing Thresholds for US taxpayers (living in the US)

Key takeaway with respect to the need to file Form 8938

There have been many unintended consequences of FATCA, many of which disproportionately affect US expats and Accidental Americans. However, it’s important to note that FATCA filing is not triggered solely by where a taxpayer resides – though residence does play a crucial role in establishing the threshold to determine whether you should file Form 8938.²

FATCA also applies to certain corporate entities

In addition to individual taxpayers, FATCA applies to certain corporate entities as well, including:

• US-registered corporations
• US-registered partnerships
• US-registered trusts

Form 8938: Statement of Specified Foreign Financial Assets

FATCA is filed using Form 8938, which has six different sections that must be completed:

• Section I – Foreign Deposit and Custodial Accounts Summary: Detail the number of foreign financial accounts (both deposit and custodial) that you hold, along with their value, and whether any were closed during the tax year
• Section II – Other Foreign Assets Summary: Report any other foreign assets you hold that are not either deposit or custodial accounts
• Section III – Summary of Tax Items Attributable to Specified Foreign Financial Assets: Report the interest, dividends, royalties, other income, gains and losses, deductions, and credits related to your foreign financial accounts
• Section IV – Excepted Specified Foreign Financial Assets: Indicate whether you have already reported specified foreign financial assets on a different form or forms within your tax filing
• Section V – Detailed Information for Each Foreign Deposit and Custodial Account Included in the Part I Summary: Provide information on your foreign financial accounts like the financial institution name, type of account, account number, and more
• Section VI – Detailed Information for Each “Other Foreign Asset” Included in the Part II Summary: Provide information on other foreign financial assets like asset type, maximum value, mailing address associated with it, and more

Accounts and assets to report 

According to the IRS,³ the following generally need to be included when reporting your foreign financial assets: 

• Foreign financial accounts
• Foreign pensions 
• Foreign stocks and mutual funds
• Foreign partnership interests 
• Foreign-issued life insurance 
• Foreign hedge funds 
• Foreign real estate held through a foreign entity (You don’t need to report the real estate, but the foreign entity itself is a specified foreign financial asset, and its maximum value includes the value of the real estate) 

Assets you directly hold in your house, such as art collections and jewelry, do not need to be reported. They are also not taken into account when determining your reporting threshold.  

As a rule of thumb, assets that you directly hold do not qualify as reportable assets. This is true whether they are held for investments or not. It’s why real estate properties, such as rental houses, only qualify as reportable assets if owned by another entity – say a corporation, trust, or estate.

The IRS has a helpful table⁴ outlining which assets qualify. 

Holding cryptocurrency may trigger Form 8938 filing

The IRS has not yet formally taken a position on whether cryptocurrency is required to be reported on Form 8938. However, if your crypto exchange isn’t based in the US and you meet the reporting thresholds, it may be in your best interest to proactively file (or have your accountant file on your behalf). The bottom line: Many tax professionals will recommend that you’ll need to complete Form 8938 like you would if you held traditional currency in a foreign bank.  

FATCA non-compliance penalties

With the information provided by foreign financial institutions, the IRS is able to identify which Americans meet the Form 8938 threshold. Every month the IRS publishes a list⁵ of the financial institutions that are signed up and complying with FATCA by reporting their US account holder details to the IRS. The total number of institutions complying is now around 400,000 worldwide. These include any and every type of financial institution, including banks, funds, and investment and pension firms.

If somebody is obligated to file it but fails to, they’re subject to a $10,000 penalty. This penalty can reach up to $50,000 if they continue to withhold payment after notification by the IRS. Americans facing a non-compliance charge may also be subject to a penalty of 40% if they underreport their assets thereby paying less than they are obligated to.

Using the Streamlined Procedures to catch up on filing US taxes

If you recently discovered that you are behind on filing your US taxes and the IRS has not yet reached out to you – that’s actually a good thing! The Streamlined Procedures are an amnesty program sponsored by the IRS that allows US taxpayers to catch up on their US taxes penalty-free, provided that they have the correct taxpayer profile. 

Learn if you qualify: Streamlined Filing Compliance Procedures: Catch Up on US Taxes with Confidence!

Partner with Bright!Tax to fulfill your US tax filing requirements 

US tax requirements are complex, frequently changing, and enforced more tenaciously than ever. Any mistakes, late submissions, or missed tax exemptions can cost you significantly – even if they were unintentional. 

Complete your US tax return with ease and confidence by partnering with Bright!Tax

Whether you need someone to file your US expat taxes, answer your questions, or help you with tax planning strategies, we’re here to help.

Get Started

References

1. Association of Accidental Americans
2. Do I Need to File Form 8938 Statement of Specified Foreign Financial Assets
3. Summary of FATCA Reporting for US Taxpayers
4. Comparison of Form 8938 and FBAR Requirement
5. FATCA Foreign Financial Institution List Search and Download Tool
6. What to do if you received a letter about FATCA reporting 
7. FAQs – FATCA Registration System – IRS

The post FATCA – Everything Expats Need to Know appeared first on Bright!Tax Expat Tax Services.

Wells Fargo hasn’t accepted expats as new brokerage clients since January 19, 2021, but the bank gave its existing expat clients longer to find a new home for their investments.

Other firms that have also turned their backs on US expats include UBS, Merrill Lynch, Charles Schwab, Fidelity, Morgan Stanley, and, most recently, UK online investment platform Nutmeg, following its acquisition by JP Morgan.

Why are banks refusing to serve Americans abroad?

The principal reason US expats have fewer options for investment management is a 2010 US law called the Foreign Account Tax Compliance Act, better known as FATCA.

The law imposes a tax on foreign financial institutions that don’t send the US government the contact and balance details of their US citizen account holders.

It also introduced a new IRS reporting form (Form 8938) for Americans with certain financial assets abroad.

It is the administrative burden of having to provide American expats’ account details to the US government that has led to foreign banks and brokerage firms closing expats’ accounts.

What options do US expats have for investing?

More and more, Americans living abroad looking for financial advice, investment management, and brokerage services are turning to specialist providers.

In most other countries, American expats may not find local specialists, so they should look to boutique firms in the US such as Thun Financial and IAM.

Catching up with filing from abroad

Many American expats have been living abroad for some time without filing. In recognition of the fact that the majority of these non-compliant expats aren’t filing because they didn’t know that they had to, in 2014 the IRS introduced an amnesty called the Streamlined Procedure that lets expats catch up without facing penalties, as long as they do so voluntarily, meaning before the IRS contacts them about it.

The post Why are banks closing US expats’ brokerage accounts? appeared first on Bright!Tax Expat Tax Services.

Many Americans who live abroad (as well as many living in the US) own foreign real estate, and they often wonder whether it needs reporting on their American tax return, and if so how.

All Americans who have certain foreign financial accounts and assets may have to report them, but exactly when and how can be complex, particularly when it comes to FBAR and FATCA reporting.

What is FATCA?

FATCA is the Foreign Account Tax Compliance Act, a US law signed in 2010 that included a new reporting requirement.

The act introduced IRS Form 8938, Statement of Specified Foreign Financial Assets.

Filing Form 8939 is a requirement for Americans whose foreign registered financial assets exceed minimum thresholds as set out by the IRS.

Americans with qualifying assets should file Form 8938 with their federal tax return, which is due by June 15 for Americans living abroad, unless they apply for an extension until October 15.

It’s worth noting that FATCA also requires foreign banks and investment firms to report their American account holders to the US Treasury directly, allowing the IRS to enforce US tax filing worldwide.

What about FBAR?

An FBAR is a Foreign Bank Account Report. It’s a separate and additional reporting requirement for Americans who have a total of over $10,000 in foreign financial (e.g. bank, pension and investment) accounts overseas at any time during a year.

So while Americans with foreign real estate don’t have to report it on an FBAR, if they also have a foreign bank account, then they may have to file an FBAR.

What reporting is required for Americans with foreign real estate?

Another scenario in which owning foreign real estate can trigger FATCA reporting is if an American has an interest in foreign real estate as an investment, rather than as a home to use or if it is held as a business (e.g. for rental income).

Expats should also note that profit made on the sale of foreign real estate may be liable to US capital gains tax, depending on the total amount of all of the individual’s capital gains that year.

What about Americans living abroad who haven’t been filing US taxes?

Americans living abroad who haven’t been filing a US tax return, because they didn’t know that they had to, can catch up without facing penalties under an IRS amnesty program called the Streamlined Procedure, so long as they do so voluntarily before the IRS contacts them about it.

The post Do Americans Have to Report Foreign Real Estate Under FATCA? appeared first on Bright!Tax Expat Tax Services.

Many expats aren’t aware though what exactly these additional reporting requirements involve, and in particular the difference between FBAR and FATCA reporting, or Form 114 vs 8938.

In this article we’ll attempt to alleviate the fog of confusion.

What is FBAR?

FBAR is an acronym for Foreign Bank Account Report. FBAR filing was introduced in 1970 to help the government police offshore tax evasion. The rule is that any American with offshore accounts with balances that together total over $10,000 at any time of the year have to report their offshore accounts by filing an FBAR.

The 1970 law, and the original threshold, remain in place today.

Filing an FBAR means filing Form 114 to FinCEN (rather than to the IRS) online each year. Because FBARs are filed to FinCEN, penalties for not filing and for incomplete or incorrect filing are much higher, starting at $10,000 for accidental violations.

The requirement to file FBARs had one large flaw for many years though – it was unenforceable. For this reason, it was ignored by many American expats.

In 2010 though, a law called FATCA (another acronym, this time for the Foreign Account Tax Compliance Act) was created. FATCA requires foreign banks and investment firms to report their US accounts holders’ balances directly to the IRS or otherwise face a tax when trading in US markets. The vast majority of foreign financial firms are now complying.

This allows the IRS to compare information provided on FBARs against that provided by banks, or see that an FBAR should have been filed but wasn’t.

Furthermore, FATCA requires Americans who have foreign financial assets exceeding certain thresholds (which start at $200,000 for expats) to report them on IRS Form 8938 when they file their federal tax return.

114 vs 8938

It’s also worth noting that in both cases, certain domestic (US) corporations, partnerships and trusts must also report their foreign registered accounts and assets.

So while there is some overlap between 114 and 8938 reporting in the sense that financial assets are often in financial accounts, they are separate requirements with different thresholds and filing one doesn’t preclude filing the other.

Catching up

Expats who are behind with their US tax filing, including FATCA and FBAR reporting, because they weren’t aware that expats had to file can catch up under an IRS program called the Streamlined Procedure, so long as they do so voluntarily before the IRS writes to them about it.

The post FinCEN Form 114 vs IRS Form 8938 – What Expats Need to Know appeared first on Bright!Tax Expat Tax Services.

The law has had many unintended consequences though, particularly for American expats all around the world.

US tax rules for expats

The American tax system is unusual in that it requires American expats to file US taxes too, reporting their worldwide income.

To avoid double taxation (i.e. paying taxes to both the US and to another country), expats can claim certain IRS provisions such as the US Foreign Tax Credit when they file, which gives them a $1 US tax credit for every dollar of foreign tax that they’ve paid.

Another provision called the Foreign Earned Income Exclusion can be claimed by expats who don’t qualify to pay foreign taxes to reduce their US tax bill, often to zero.

Expats also have to report foreign businesses, gifts, and trusts, as well as their foreign registered bank accounts, investments and assets, depending on their values.

For example, Americans who have a total of $10,000 in foreign registered financial accounts at any time in the year, including accounts that they have signatory authority or control over even if not in their name, must be reported to FinCEN on an FBAR (Foreign Bank Account Report).

FATCA

While Americans have been required to report their offshore accounts by filing an FBAR since 1970, FATCA sought to address the fact that the IRS had no way of enforcing the requirement.

The US government hoped that doing so would provide an incentive for more Americans with foreign income to report it, so increasing federal tax revenue, a priority following the 2008 financial crisis.

More significantly, FATCA also compels all foreign banks and other financial firms (such as investment firms) to report their American account holders to the IRS, including their contact and account balance details.

FATCA achieved this by imposing a tax on foreign financial firms that don’t provide this information when they trade in US markets (which, due to America’s financial global dominance, they all do). As a result, almost all foreign financial firms are now complying.

FATCA consequences for expats

FATCA forced foreign banks and investment firms to face a choice to avoid the new tax: they must either embrace the new administrative burden of reporting American clients to the IRS, or stop accepting American clients.

It is really a business decision for each firm: which option would cost them less. So for many foreign banks with a small number of American clients, it made more sense to close those accounts and not provide services to Americans any more.

This has resulted in thousands of Americans living overseas experiencing difficulties accessing foreign banking and investment services.

Under FATCA, foreign banks must also ask their American clients to confirm that they are up to date and compliant with their US tax reporting responsibilities. This has led millions of Americans to learn for the first time that they have to file US taxes from abroad.

US expats have little choice but to comply with their US reporting obligations, or risk penalties and possible foreign bank account closures. 

IRS and particularly FinCEN penalties for not filing and reporting can be steep, and the IRS now knows who should be filing thanks to information received from foreign banks under FATCA as well as foreign tax information received from foreign governments.

Expats who haven’t been filing because they didn’t know that they had to can catch up without facing penalties under an IRS amnesty program called the Streamlined Procedure, so long as they do so before the IRS contacts them about it.

The post 2020 FATCA News for US Expats appeared first on Bright!Tax Expat Tax Services.