Depending on several factors, if you conduct business internationally, you may need to adhere to FATCA reporting rules.
Signed into United States law in 2010 by former President Barack Obama, FATCA, which stands for Foreign Account Tax Compliance Act, was meant to combat the growing incidence of tax evasion by American citizens and corporations after the 2008 financial recession.
At the time, large companies and individuals alike who had investments, assets, or who were operating in foreign countries, were simultaneously using foreign financial institutions to keep funds in offshore accounts to bypass paying taxes on these assets.
From savings accounts to checking and brokerage accounts, accounts maintained by a foreign financial institution must now be reported to the Internal Revenue Service (IRS) at certain thresholds.
As a result, business owners who operate internationally or have clients in other countries may need to file a form 8938 with the IRS. Both foreign financial institutions (FFI) and U.S. taxpayers can be severely penalized for failing to report assets to the IRS.
A foreign financial institution, as defined by FATCA, is any financial institution that is a foreign entity, and that also takes deposits, holds financial assets for others as a significant portion of its business, or is primarily engaged in investing, as well as trading commodities or interest on these assets.
Foreign financial institutions can be banks, mutual funds, investment firms like hedge funds, and sponsored entities, and can also include some types of insurance companies. Each month, the IRS updates a freely accessed FATCA FFI list you can download and search through.
In short, specific foreign financial assets that are required for reporting include accounts maintained at a foreign financial institution, as well as assets that aren’t kept in foreign accounts. This means stocks or securities you receive from foreign corporations, or other financial contracts held for investment.
As per the IRS, if you are an ex-pat living abroad, a 8938 form is needed if:
For taxpayers living in the U.S., you’re required to file an 8938 when:
When it comes to filing form 8938, you may feel confused, lost, or overwhelmed by the process and what’s needed from you and your business. To help you avoid penalties from the IRS, connect with the experts at Accountants without Borders.