Passed in 2010, the FATCA is a United States law that requires citizens living in the U.S. or abroad to annually file reports on foreign account holdings or assets they may have. The measures were part of the Hiring Incentives to Restore Employment Act (HIRE) and were designed to support transparency in the global financial services sector.
FATCA poses additional tax requirements on U.S. citizens who have accounts in foreign countries. This includes ex-pats or United States business owners who conduct business internationally. Continue reading to learn more about FATCA, what its requirements are, and if it applies to you.
What is FATCA?
FATCA stands for Foreign Account Tax Compliance Act. It was signed into law by former President Barack Obama in 2010 along with the HIRE Act. After the 2008 financial crisis, unemployment rates were at unprecedented levels in America, and the HIRE Act was supposed to incentivize businesses to hire employees. The incentives involved a business tax credit for each new employee that was hired and retained for at least 52 weeks.
Along with promoting businesses to hire new team members, the FATCA Act was passed to grapple with the abundant tax evasion being practiced by American individuals and corporations who were investing, operating, or earning taxable income in other countries. FATCA requires that U.S. taxpayers report all financial assets and accounts that are held outside of the country and pay taxes on them on an annual basis.
Although it’s legal to maintain offshore accounts, not disclosing that account to the Internal Revenue Service (IRS) is illegal and subject to large penalties when left unreported, and the foreign account and assets exceed $50,000 in a given year.
What needs to be reported for FATCA?
FATCA has its own reporting requirements that are specified as foreign assets by the IRS. These types of assets include:
- Foreign pensions
- Foreign hedge funds
- Foreign real estate that’s held by a foreign entity
- Foreign stockholdings
- Foreign financial accounts
Depending on your situation, these definitions could be broad and difficult to determine on your own. If you need help understanding exactly what FATCA requires of a U.S. citizen living as an ex-pat, don’t hesitate to reach out to Accountants without Borders.
In short, the IRS has reporting thresholds depending on if you’re single and/or file separately from your spouse and you have more than $200,000 in foreign financial assets at a year’s end, and you also live abroad. Or more than $50,000 in foreign assets but you live in the United States. When you meet the threshold required for filing, a United States citizen must submit Form 8938.
Penalties for Non-Compliance
Failing to file form 8938 if the requirements apply to you can result in a $10,000 fine, and penalties of up to $50,000 if one continues to not report assets and file an 8938 after receiving notification from the IRS.
The statute of limitations for failing to file in a tax year may be extended to three years if the party provides the required information, and a penalty for not disclosing assets may be waived should the failure to disclose be found reasonable. However, this is always on a case-by-case basis.
Does FATCA Apply to Non-U.S. Entrepreneurs?
FATCA applies to individual citizens, those who reside in America, and non-resident aliens. In short, if you are paying taxes in the United States and you have taxable assets held abroad, you will need to file an 8938.
Accountants without Borders: Providing Expert Advice about Starting a Business in the U.S. and Abroad
Ready to see your business vision become a reality? At Accountants without Borders, we’re here to help you navigate the financial complexities of starting a business in the U.S. or abroad. And if you need help understanding FATCA requirements, we’re here to provide professional guidance. Contact us today to learn more.