In 2010, the United States created a federal law to combat foreign asset tax evasion called the Foreign Account Tax Compliance Act (FATCA). FATCA reporting applies to U.S. taxpayers and depends on a monetary threshold of foreign financial assets. Internal Revenue Service (IRS) Form 8938 is used to report these financial assets and is filed together with individual annual tax filings. The predetermined threshold amounts for this form can vary based on whether you live abroad, or in the U.S and on your filing status (Married filing jointly have higher thresholds compared to individuals filing single or separately). Taxpayers meeting these requirements may also need to file FinCen Form 114, Report of Foreign Bank and Financial Accounts (FBAR) to the Department of Treasury.
What is FATCA and Form 8938?
The purpose of FATCA is to prevent tax evasion of U.S. individuals who own offshore assets and accounts. FATCA states that particular U.S. taxpayers with financial assets outside of the U.S. must report them on the “Statement of Specified Foreign Financial Assets,” also known as Form 8938. When filing Form 8938, it must be attached to the taxpayer’s standard annual income tax return.
The changes to the Offshore Voluntary Disclosure Program (OVDP) is an example of how the IRS is constantly updating FATCA to improve guidance. Read about the latest developments from the IRS and Treasury Department from the IRS website.
Who Must File Form 8938?
U.S. taxpayers holding foreign financial assets worth at least $50,000 in aggregate value must file Form 8938. Other individuals, such as married taxpayers filing a joint annual income tax return may have a higher threshold – the IRS provides a side-by-side comparison tool which details who must file, FATCA reporting thresholds, what is report, due dates and penalties for failure to file.
reporting thresholds, what is report, due dates and penalties for failure to file.
This threshold can also apply to taxpayers permanently living in foreign countries with certain financial accounts. 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
What categorizes you as “living abroad?” The government considers an individual to be living abroad if they are present in a foreign country for a minimum of 330 days of a 1-year period. Financial institutions abroad and foreign governments in an agreement with the United States submit reports to the IRS containing information on the international finances of US Taxpayers. Failure to report, by any individual, financial entity or government can result in hefty penalties.
Here are the detailed FATCA reporting thresholds for taxpayers living abroad via the IRS. You must file Form 8938 if you are required to file an income tax return, and:
- You are married filing a joint income tax return and the total value of your specified foreign financial assets is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year. These thresholds apply even if only one spouse resides abroad. Married individuals who file a joint income tax return for the tax year will file a single Form 8938 that reports all of the specified foreign financial assets in which either spouse has an interest.
- You are not a married person filing a joint income tax return and the total value of your specified foreign financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year.
Here are the detailed FATCA reporting thresholds for taxpayers living in the U.S. via the IRS. You must file Form 8938 if you are required to file an income tax return, and:
- You are unmarried and the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
- You are married filing a joint income tax return and the total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.
- You are married filing separate income tax returns and the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. For purposes of calculating the value of your specified foreign financial assets in applying this threshold, include one-half the value of any specified foreign financial asset jointly owned with your spouse. However, report the entire value on Form 8938 if you are required to file Form 8938.
You may have to file additional forms to Form 8938 regarding foreign assets. These can include FinCEN Form 114, Report of Foreign Bank and Financial Accounts. This section is very important, as there are serious penalties for failing to report foreign financial assets. If you are unsure if you fall under the classification of people who should file Form 8938, it is wise to consult an international tax specialist.
Penalties of Failed FATCA Reporting
Penalties for failing to file Form 8938 can be severe. The first base penalty is $10,000 for failing to file Form 8938. If the form is not filed for a considerable amount of time after this penalty and IRS notification is given, then an extra $50,000 fine can be incurred. An understatement of tax attributable to non-disclosed assets will be allotted along with these non-compliance fees. This penalty rate is currently at 40%.
The statute of limitations can be extended to six years under certain circumstances. This includes if you fail to include at least $5,000 attributable to a specified foreign financial asset on Form 8938. If an asset is merely not reported on Form 8938, then there is a three-year extension regarding statute of limitations. Failures due to reasonable cause can allow for a longer statute of limitations in some cases.
Brunoro Law Specializes in FATCA Reporting
FATCA reporting and filing requirements can be complex, with severe financial implications. As a US Taxpayer, it is important to understand relevant aspects of offshore financial assets, and how they affect taxes. Detailed information is required to successfully submit Form 8938. This information can be difficult to gather, especially when dealing with foreign entities. The international tax specialists at Brunoro Law can ensure all filings are complete and in compliance. If you had a Form 8938 filing requirement and you failed to comply, Brunoro Law can help you as well! Contact us for a free consultation.