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The Foreign Account Tax Compliance Act (FATCA) was passed to mandate U.S. taxpayers to report their foreign account assets. This is the United States’ effort to identify tax evasion by U.S. taxpayers holding financial assets abroad. Individuals need to be aware of how this law impacts the reporting of foreign assets.
FATCA not only affects individuals, but foreign financial institutions and foreign governments as well. Financial institutions abroad and foreign governments who have entered in an agreement with the United States submit reports to the Internal Revenue Service which contain information on the international finances of United States citizens and Permanent Residents. Failure to report, as required, by any individual, financial entity or government can result in stiff penalties.
FATCA requires U.S. taxpayers holding financial assets outside the United States to report those assets to the Internal Revenue Service (IRS) on Form 8938, Statement of Specified Foreign Financial Assets. This is in addition to the requirement to report foreign financial accounts on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) to the Department of Treasury. You may also be subject to filing requirements of Form 8938, Statement of Specified Foreign Financial Assets, if you have an interest in foreign financial assets which exceed a predetermined threshold.
Reporting thresholds are based on marital status, whether you file an individual or joint federal income tax return and whether or not you live in the United States.
Unsure if you should file Form 8938 or FinCEN Form 114?
The Internal Revenue Service provides a side-by-side comparison tool which details who must file, reporting thresholds, what is reported, filing due dates, and outlines penalties for failure to file. The tool also includes 19 types of foreign assets and indicates which are reportable under which form.
Foreign Financial Assets Subject to Reporting
The IRS provides examples of financial accounts that must be reported but is careful also to state that you may be required to report other items that do not appear on the list.
The list below is a partial list as reflected on the IRS website as of the date of this article.
- Savings, deposit, checking, and brokerage accounts held with a foreign bank or broker-dealer
- Stock or securities issued by a foreign corporation
- A note, bond or debenture issued by a foreign person
- An interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap or similar agreement with a foreign counterpart
- An option or other derivative instrument with respect to any of these examples or with respect to any currency or commodity that is entered into with a foreign counterpart or issuer
- A partnership interest in a foreign partnership
- An interest in a foreign retirement plan or deferred compensation plan
- An interest in a foreign estate
- Any interest in a foreign-issued insurance contract or annuity with a cash-surrender value
The Exposure Risk of Failure to Report
U.S. taxpayers with an aggregate value of foreign assets exceeding $50,000.00 (USD) are subject to reporting using Form 8938. Failure to file this report could put you at risk for a penalty of $10,000.00 (USD) (and a penalty up to $50,000.00 (USD) for continued failure after IRS notification). Keep in mind that it’s not only about reporting foreign assets but about reporting them completely and accurately. Underpayments due to a failure to disclose foreign financial assets may subject you to an additional 40% penalty.
What to Do If You Failed to Report in Prior Years
We first need to understand that the IRS has set time limits on when it can assess taxes. This is known as the statute of limitations. If you fail to file or adequately report a foreign financial asset, the statute of limitations is limited to three (3) years following the time you submit the required information. On the other hand, if you were required to report and you omitted from your gross income more than $5,000.00 (USD) that was to be attributed to a foreign financial asset, the IRS statute of limitations is extended to six years after you properly submit your tax return.
If you can successfully present evidence to the IRS that you did not intentionally fail to report as required, it’s possible that no penalty will be imposed for failure to file Form 8938. Final decisions are made on a case-by-case basis.
Due to the ongoing changes in tax and reporting laws in the United States, please consult with a tax attorney or qualified tax professional for details on how to handle your particular situation. The information shared in this article is not intended nor a substitute for legal or tax advice from a qualified professional.
We also encourage readers to further explore this topic via these resources:
- FATCA Intergovernmental Agreements
- About Form 8938, Statement of Specified Foreign Financial Assets
- Form 8938, Statement of Specified Foreign Financial Assets
- Instructions for Form 8938, Statement of Specified Foreign Financial Assets
- Report of Foreign Bank and Financial Accounts (FBAR)