If you hold or earn foreign assets as a US taxpayer, it’s extremely important that you familiarize yourself with the piece of legislation known as FATCA – the Foreign Account Tax Compliance Act. Designed as a way to standardize reporting guidelines and annually learn about US taxpayers’ foreign holdings, FATCA exists largely to combat tax evasion through offshore means. As you can imagine, the Treasury Department and the IRS take this area very seriously, so it’s in your best interest to make sure you completely understand what’s expected of you.
First, let’s talk about the Statement of Specified Foreign Financial Assets. That’s the fancy name for Form 8938, and it is a main way that US taxpayers report their foreign holdings to the IRS. Note that this is separate from FinCEN Form 114, better known as FBAR. Failure to file Form 8938 can and will bring down the full brunt of the IRS’ punitive abilities, as it will appear that you are attempting to hide or misrepresent the amount and nature of your overseas assets.
An interesting element of FATCA lies in its reporting requirements for foreign banks and financial institutions. That’s right: the financial entities themselves are now required under US law to report directly to the IRS, a requirement that affects insurers, escrow companies, real estate investment entities, and more. You may remember that when you first opened that foreign account, they asked for fairly specific information about your United States citizenship. That’s a direct result of FATCA and the drive towards total transparency when it comes to US citizens and their foreign tax obligations.
FATCA requirements are in addition to the long-standing requirement to report foreign financial accounts on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) (formerly TD F 90-22.1).
As with any tax matter, there is substantial nuance to be found within FATCA and what’s expected of you. Among the considerations that will affect your reporting are value thresholds, exceptions, and fair market valuations that need to be performed in good faith.
Let’s start with the reporting threshold. Good news: if you’re single (or filing separately) and living in the United States, you only need to worry about Form 8938 if your foreign assets meet or exceed $50,000 (or if they exceeded $75,000 at any point during the year in question). If you’re single and living abroad, that threshold balloons to $200,000 (or above $300,000 at any point during that tax year).
For married couples, those figures rise, as you might expect. Married couples filing jointly who live in the United States have a $100,000 threshold (or $150,000 at any point during the tax year). If you’re a married couple living abroad, those numbers become $400,000 and $600,000, respectively.
There are exceptions that make Form 8938 unnecessary or redundant, though you’ll want to double check with a tax attorney before drawing that conclusion. Examples of this include foreign corporations reported (Form 5471), passive foreign investments (Form 8621), foreign partnerships (Form 8865), and Canadian retirement accounts (Form 8891).
There’s also the pesky matter of asset valuation. The IRS is looking to see an estimate representing the highest fair market value appraisal for financial accounts or assets. Don’t even think about trying to game the IRS by undervaluing these holdings, as the penalties are substantial. As usual, the IRS offers avenues to ease valuation concerns for taxpayers who are seeking to minimize their obligation in good faith.
Speaking of penalties, you’d better be positive about what’s expected of you before failing to file Form 8938. In addition to a $10,000 failure to file penalty (which can inflate to $50,000 if you continue to dodge the IRS), there’s a whopping 40% penalty on understatement of tax that’s directly linked to undisclosed foreign assets.
As you can see, foreign tax obligations are not an area to make guesses, be unprepared, or proceed with anything short of laser-focused precision. A mistake in this area can come with lasting, immensely punitive consequences. That’s why trusting an experienced tax attorney to handle your FATCA requirements is the safest path to financial stability and absolute tax compliance.