Tax on Expatriates – FATCA
For one reason or another, thousands of American citizens are living outside the United States at any given time. Many retirees are taking advantage of the lower cost of living and temperate climate offered south of the border while younger individuals and families are abroad for school, business, or simply for the adventure. While living abroad certainly has its advantages, there are also disadvantages. Living abroad has always come with challenges. Learning a new language, adapting to a new culture, and adjusting to a different pace of life have always been among those challenges. Recently, Americans living abroad have faced a new challenge. This one, however, does not come from their adopted country but from their homeland. With the passage of the Foreign Account Tax Compliance Act, or FATCA, many expatriates are worried about the penalties they face from the Internal Revenue Service for failing to comply with complex provisions of FATCA.
Wealthy Americans have historically taken advantage of foreign tax havens. Everyone knows what a “Swiss bank account” means. Several countries in Central America as well as the Caribbean have also been popular options for off-shore accounts. Because these countries have traditionally maintained a policy of confidentiality with regard to the identity of account holders, wealthy Americans have been able to hide large sums of money in these offshore accounts and allow the funds to earn interest tax-free. As a result, experts estimate that the U.S. government loses as much as $100 billion dollars each year in revenue. FATCA was passed in 2010 in an attempt to tighten up the reporting requirements for foreign financial accounts which will, in turn, result in a dramatic increase in tax revenue for the U.S. government each year. Unfortunately, FATCA applies to everyone living outside the United States and/or everyone who has a financial account located outside the U.S., and the potential penalties for non-compliance are steep.
FACTA has two main provisions. The first requires foreign financial institutions to enter into an agreement with the IRS. The agreement obligates the financial institution to provide names, TINs, addresses, and transactional information regarding accounts held by U.S persons. The second provision requires most U.S. persons who have foreign accounts or certain types of assets to complete and file IRS Form 8938 “Statement of Specified Foreign Financial Assets” with their tax return each year. As a general rule, Form 8938 is only required if the value of the assets exceeds $50,000; however, there are exceptions to that general rule. In addition to Form 8938, financial accounts that total more than $10,000 must be disclosed using a “Foreign Bank Account Report”, or FBAR. To complicate matters, not only to account holders need to file a FBAR, but so do beneficiaries, signatories, and anyone with a power of attorney over the account.
Making a mistake on Form 8938 or failing to comply with the FATCA requirements for any other reason can incur a hefty penalty. The civil penalty for failing to disclose assets or accounts on Form 8938 can be as high as $10,000 plus an additional $10,000 for every 30 days of non-disclosure after the IRS officially provides notice of a failure to disclose. The maximum civil fine is $60,000 for a FATCA violation. The penalty for failing to file a FBAR is also up to $10,000 for a non-willful violation. For a willful violation, however, the penalty is the greater of $100,000 or 50 percent of account balances.
If you are an American living abroad and/or you own assets or financial accounts outside the United States you are likely subject to the provisions of FATCA. To ensure that you comply with all the FATCA requirements be sure to retain the assistance of an experienced accounting professional when you prepare your tax return this year and in subsequent years.