Many American expats first find out about FATCA (the Foreign Account Tax Compliance Act) when they receive a letter from their foreign bank or brokerage asking them to confirm their US tax compliance. Receiving this letter is typically unexpected, and can also be perturbing. FATCA affects many Americans living abroad, so it’s important to understand its implications and reporting requirements, not just to stay informed, but to avoid possible IRS penalties.
In this article, we’ll demystify FATCA and offer practical advice for Americans living abroad.
- What is FATCA?
- Who needs to report?
- What does FATCA reporting involve?
- FATCA penalties for non-compliance
- FATCA advice for Americans abroad
What is FATCA?
The Foreign Account Tax Compliance Act was enacted in 2010 as part of the HIRE law. It was intended to enhance tax compliance for Americans holding financial assets outside the United States following the 2009 Swiss banking scandal.
FATCA has two aspects that affect expats. First, it introduced a substantial tax on all foreign banks and other financial institutions if they don’t report their American account holders’ details, including contact and account balance details, to the IRS. The tax is applied when they trade in US markets, which due to the hegemony of the US financial system, all banks need to. To avoid this tax, all foreign banks and other financial firms are now either complying with FATCA or refusing to have American clients.
Second, FATCA imposed a new reporting requirement on Americans with financial assets abroad, alongside the existing FBAR reporting requirement for Americans with foreign financial accounts. While there is often overlap between these two reporting requirements, they are separate and both carry penalties for not filing. Note also that FBARs (Foreign Bank Account Reports) are filed to the US Treasury, while FATCA reporting is to the IRS.
Who needs to report?
FATCA reporting is required by all US taxpayers, including US citizens, residents and Green Card holders. The IRS has laid out detailed criteria for banks to screen all their clients and identify those who fall into this category. Note that FATCA reporting is only applicable for Americans who have certain financial assets (including bank and brokerage account balances) at institutions outside the US (including foreign branches of US firms) and these assets exceed a certain value that depends on whether you file single or married and whether you are a US resident or non-resident.
What does FATCA reporting involve?
All US persons must file IRS Form 8938 if their total foreign financial assets exceed certain thresholds and the filer is resident abroad. Note that the thresholds are much lower for Americans resident in the US with foreign financial assets.
In terms of the filing date, Form 8938 should be filed along with your US tax return, so by June 15th for Americans living abroad, although you can request an extension to October 15th.
FATCA penalties for non-compliance
Failing to file IRS Form 8938 carries a minimum penalty of $10,000 per year, potentially escalating to 40% of the assets or accounts’ value.
This is in addition to the similar penalties for not filing FBARs.
FATCA advice for Americans living abroad
- If your foreign bank or other financial provider sends you a letter relating to you US taxes, reply promptly to ensure continuation of services.
- Discuss your non-US assets with your expat financial advisor to ensure that you comply with IRS FATCA (and FBAR) reporting requirements.
- Also discuss transferring some of your investments to US-based institutions with your expat financial advisor, to potentially reduce FATCA related reporting.
- Ensure that your overall portfolio meets your personal needs in terms of diversification, risk levels, and currency exposure based on your personal financial goals.
The fact that many US banks and brokerage firms are reluctant to retain American clients without a US residential address, combined with foreign financial firms being reluctant to have US clients due to FATCA, has created a difficult and often frustrating environment for US expat investors. However, there are still options. Consult an expat financial advisor to find the investment and banking solutions that work best given your circumstances.
If you have any questions about financial planning as an American living abroad, get in touch.
This article is for informational purposes only; it is not intended to offer advice or guidance on legal, tax, or investment matters. Such advice can be given only with full understanding of a person’s specific situation.