For a long time, US taxpayers had shifted their profits to low-tax or no-tax jurisdictions to evade taxes in this country. That’s why the government has implemented the Foreign Account Tax Compliance Act (FATCA). It is one of the solutions to put a stop to harmful tax practices.
If you are a US taxpayer or your company is incorporated in the United States, chances are you need to comply with FATCA reporting requirements. Below is a simple guide on FATCA so that you can understand what it is.
1. What is FATCA in Simple Terms?
As a part of the Hiring Incentives to Restore Employment Act (HIRE Act), the Foreign Account Tax Compliance Act (FATCA) serves the purpose of putting an end to tax evasion from local taxpayers. It has 2 main reporting requirements.
First, FACTA requires US persons to report their foreign financial accounts and assets to the Internal Revenue Service (IRS). Falling to so so will result in heavy financial penalties. This is the matter we will discuss further in the subsequent sections.
Second, FATCA imposes certain requirements on foreign financial institutions (also some non-financial organizations). In particular, they are required to report to the IRS details on the financial accounts and other financial assets of:
- US taxpayers; or
- Foreign entities in which US taxpayers substantially hold ownership.
Financial institutions include but not limited to:
- Investment entities;
- Brokers; and
- Certain insurance companies.
These relevant institutions must collect details and identify whether their account holders are US persons. If account holders fail to provide sufficient information, the institutions are required to apply a US withholding tax of 30% on any US-sourced income paid to such account holders.
So, if you are a US person, next time you open an account with foreign banks or financial organizations, don’t be surprised if they demand further documentation from you.
2. Who is an Applicable US Person under FATCA?
Not all US persons are subject to FATCA. Only specified persons (including both individuals and domestic entities) need to follow FATCA regulations.
You are a specified individual if you are:
- A US citizen;
- A resident alien of the US at any time of a tax year. This means you are not a local citizen (alien) and satisfy the green card test or the substantial presence test;
- A non-resident alien that elects to be treated as a resident alien; or
- A non-resident alien who is a bona fide resident of American Samoa or Puerto Rico
Specified Domestic Entities
Your entity incorporated in the US will be subject to FATCA reporting if it is:
- A closely held domestic corporation or partnership whose passive income accounts for at least 50% of the gross income;
- A closely held domestic corporation or partnership whose at least 50% of its assets are used for generating passive income; or
- A trust that has at least one specified individual or entity as a current beneficiary.
A corporation is considered closely held when a specified individual directly, indirectly, or constructively owns at least 80% of the total voting power or 80% of the total stock value of the corporation, on the last day of the corporate tax year.
A partnership is considered closely held when a specified individual directly, indirectly, or constructively owns at least 80% of the capital or profits interest in the partnership, on the last day of the partnership’s tax year.
3. What is the FATCA Reporting Requirement?
According to FATCA, being a specified US person, you must report the information of all foreign financial accounts and assets when their total value exceeds a regulated threshold.
What are considered foreign financial assets?
They are investment assets that are not held in a financial account maintained by financial institutions, including:
- Stock and securities issued non-US persons;
- Interest in a foreign entity; and
- Other types of financial instruments or contracts issued by non-US persons.
Reporting Thresholds for Individuals
The threshold varies depending on your residency, marital status, and filing options.
In particular, if you are living in the US and unmarried (or married but file tax returns separately), you will need to report for FATCA if the total value of your foreign accounts and assets when their total value exceeds:
- $50,000 on the last day of the tax year in question; or
- $75,000 at any time of the year.
In case you are living outside the US and unmarried (or married but file tax returns separately), you will need to report for FATCA if the total value is more than:
- $200,000 on the last day of the tax year in question; or
- $300,000 at any time of the year.
If you are married and file joint tax returns, the threshold will be doubled.
Reporting Thresholds for Entities
If you own a specified domestic entity, it must comply with the FATCA filing requirement when its total value of foreign accounts and assets reaches:
- $50,000 on the last day of the tax year in question; or
- $75,000 at any time of the year.
When and How to File
You must file Form 8938 and attach it to your annual tax return by the due day of filing such return. The IRS does not accept you submitting such form separately from the tax return.
4. What are the FATCA Reporting Exemptions?
If you don’t need to file your tax return with the IRS, you are exempt from filing Form 8938 for FATCA.
Moreover, if certain kinds of financial assets have already been reported in other forms, you don’t need to further report them in Form 8938. However, you must list out these forms in Form 8938 to demonstrate that the assets have already been reported.
5. What Are the Penalties for FATCA Non-compliance?
Falling to file correctly a Form 8938 may cause you an initial fine of $10,000. You then get 90 days to submit the correct form to the IRS. Subsequent failure will cost you an additional $10,000 for each period of 30 days since the end of the 90-day period. The maximum additional penalties go up to $50,000.
In case you underpay your tax by not reporting specified foreign financial assets, you will be fined 40% of the underpayment. The same goes for underpaying your tax due to fraud, the fine will be 75% of the underpayment.
Further non-compliance may result in criminal penalties.
However, if you can have reasonable cause for the failure of filing Form 8938, no penalties shall be imposed. You will need to back up such cause with sufficient evidence. The IRS will determine whether the cause is valid according to a case-to-case basis, considering all specific factors.
6. What are the Differences between FATCA and FBAR?
Don’t mistake FATCA filing requirements for those of FBAR. These are 2 different kinds. The Foreign Bank And Financial Accounts Report (FBAR) also requires you to report your foreign accounts to the local US authority, when their total value exceeds a regulated threshold.
The first main difference between FATCA and FBAR is the latter only focuses on foreign financial accounts, meanwhile, the former requires you to further report on other financial assets. The threshold of the former is also higher than the latter.
The second main difference is the authorities to which you file the reports. For FATCA, you will file Form 8938 with the IRS as we discussed above. For FBAR, you will need to file FinCEN Form 114 with the office of Financial Crimes Enforcement Network (FinCEN).
Filing for FATCA does not grant you an exemption from filing for FBAR. If you are subject to both requirements, you will need to file for both, separately. Certain foreign financial accounts may be reported on both forms (Form 8938 and FinCEN Form 114), but the required information on each form may be different, in most cases.
If applicable, for FBAR, you have to file FinCEN Form 114 electrically with the office of FinCEN by April 15. Meanwhile, for FATCA, you must attach Form 8938 to your annual tax returns filed with the IRS by such return’s due date.
US taxpayers, including individuals and certain domestic entities, must comply with FATCA reporting requirements. They have to report on their foreign financial accounts and financial assets when the total value of them exceeds a threshold. The threshold varies depending on certain factors (mainly residency and marital status).
To comply with FATCA filing requirements, US specified persons must attach Form 8938 to their annual tax returns and submit them to the IRS. Non-compliance may cost up to $60,000 of fines and further result in criminal penalties.
Disclaimer: While BBCIncorp strives to make the information on this website as timely and accurate as possible, the information itself is for reference purposes only. You should not substitute the information provided in this article for competent legal advice. Feel free to contact BBCIncorp’s customer services for advice on your specific cases.
- 1. What is FATCA in Simple Terms?
- 2. Who is an Applicable US Person under FATCA?
- 3. What is the FATCA Reporting Requirement?
- 4. What are the FATCA Reporting Exemptions?
- 5. What Are the Penalties for FATCA Non-compliance?
- 6. What are the Differences between FATCA and FBAR?
- 7. Conclusion
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