A Taxpayer’s Guide to Compliance Under FATCA

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A Taxpayer’s Guide to Compliance Under FATCA

 

Under the Foreign Account Tax Compliance Act (FATCA), U.S. citizens, including Americans living abroad, are required to report their foreign assets to the Internal Revenue Service (IRS) if they exceed a certain threshold amount.  The FATCA requirement is in addition to the well-established Foreign Bank Account Report (FBAR).  Taxpayers who fail to file will face significant penalties

This article explores the FATCA filing and reporting requirements including who needs to file and what kind of foreign assets are involved, as well as the penalties associated with noncompliance.

FATCA Filing Requirements

FATCA was enacted to combat tax evasion by requiring the disclosure of offshore accounts and foreign assets owned by U.S. citizens.  Under FATCA, certain U.S. persons will have to report their foreign assets to the IRS under Form 8939, Statement of Specified Foreign Financial Assets along with their U.S. income tax return.

For purposes of FATCA, a U.S. person is defined as:

  • A U.S. citizen including dual citizens;
  • A U.S. resident including green card holders;
  • A domestic partnership, corporation, estate, or trust that is created or organized in the U.S. or under the laws of the U.S.;
  • A foreign partnership or corporation that is owned at least 10% by a U.S. person or a U.S. corporation;
  • A foreign trust that has a U.S. person as a grantor or a beneficiary.

Whereas the FBAR pertains to foreign account balances of $10,000 or more, FACTA extends to non-account foreign assets and involves much higher reporting thresholds.

The Act sets forth different reporting thresholds depending on whether the taxpayer lives abroad or is married.  You will be required to file FATCA if your foreign assets exceed the following thresholds:

  • Single Taxpayers Living in the United States: $50,000 on the last day of the tax year or $75,000 at any point during the year;
  • Married Taxpayers Living in the United States: $100,000 on the last day of the tax year or $150,000 at any point during the year;
  • Single Taxpayers Living Abroad: $200,000 on the last day of the tax year or $300,000 on any day of the year;
  • Married Taxpayers Living Abroad: $400,000 on the last day of the tax year or $600,000 on any day of the year.

The Act defines “Specified Foreign Financial Assets” as those that include:

  • Foreign accounts held at foreign financial institutions;
  • Foreign stock and securities not held in a financial account;
  • Foreign partnership interests;
  • Foreign mutual funds;
  • Foreign hedge funds and private equity funds;
  • Contracts with non-U.S. persons;
  • Foreign accounts and investment assets held by a foreign or domestic trust in which the U.S. taxpayer is the grantor’

Many assets are excluded from FATCA such as foreign currency, personal property or precious metals held outside of an account or an interest in a social security or similar program of a foreign government.  Also, if you reported specified foreign financial assets on other forms, you typically do not have to report them a second time on Form 8938.  You are encouraged to consult with a tax attorney to determine whether your interests abroad require that you file under FATCA.

Foreign Asset Valuation to Evaluate FATCA Requirements

The IRS sets forth guidance as to how to properly place a value on your specified foreign financial asset in order to determine whether it exceeds the threshold applicable to you.

The general rule is to use a reasonable estimate of the highest fair market value of the asset during the tax year that it is reported.   It is acceptable to rely on financial account statements as long as the values therein reasonably approximate the maximum value of the asset during the tax year. It is also acceptable to rely on publicly available information from reliable sources.  If there are no financial statements or reliable publicly available information from which to approximate maximum asset value, a reasonable estimate of the fair market value of the asset will suffice.

Your tax attorney or tax professional can assist you in determining whether your foreign interests and assets exceed the FATCA thresholds and trigger filing requirements.

Harsh Penalties for FATCA Noncompliance

If you are required to file under FATCA and fail to do so, you will encounter harsh penalties to the tune of $10,000 per violation plus an additional penalty of up to $50,000 for continued failure to file after IRS notification, and a 40% penalty on an understatement of tax attributable to non-disclosed assets.

In addition, the IRS will extend the statute of limitations periods when the taxpayer omits certain amounts from gross income that are attributable to a specified foreign financial asset or when you fail to file or property report an asset on Form 8938.  This gives the IRS more time to assess penalties associated with the taxpayer’s noncompliance.

Given that the penalties can be excessive, it is prudent to speak with a tax attorney to determine whether you are required to file Form 8938 as per FATCA and how to remedy any noncompliance issues.

Do You Need a Tax Attorney?

A tax attorney can help you determine whether your financial interests abroad require that you file Form 8938 as per FATCA and determine to what extent penalties may have already been assessed.

If you were required to file under FATCA but did not, a tax attorney can help you avoid or minimize penalties via streamlined procedures to become filing compliant.  The special IRS procedures are designed for U.S. taxpayers living abroad who have failed to file and recently become aware of their filing obligations.

If the voluntary disclosure and streamlined filing compliance procedures do not apply, a tax attorney can determine whether you have a viable penalty abatement request.  If the taxpayer can establish that any failure to disclose is due to reasonable cause and not willful neglect, no penalty will be imposed for failure to file Form 8938.

The experienced tax attorneys at Segal, Cohen & Landis have helped clients with financial interests, accounts and assets abroad by providing the following services:

  • Counsel on FATCA filing requirements;
  • Assist with Form 8938 completion and submission;
  • Filing compliance and penalty avoidance or reduction via participation in a streamlined compliance procedure.

If you are interested in having a complimentary consultation with one of our partner attorneys regarding your tax matter, please feel free to contact us at 866-505-1872.  We would be happy to advise you as to how we can resolve your case and how much it would cost.

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