FATCA: Reporting Obligations for U.S. Taxpayers and Foreign Financial Institutions
The Foreign Account Tax Compliance Act (“FATCA”), enacted in 2010 as part of the Hiring Incentives to Restore Employment Act, introduced extensive reporting and disclosure obligations for U.S. taxpayers holding foreign financial assets, as well as for certain foreign financial institutions.
FATCA was designed to combat offshore tax evasion by increasing transparency and requiring the disclosure of specified foreign financial assets to the U.S. Internal Revenue Service (“IRS”).
Under FATCA, certain U.S. taxpayers with interests in foreign financial assets exceeding applicable thresholds are required to report those assets to the IRS through Form 8938, which is filed together with the taxpayer’s annual federal income tax return. These obligations may apply to U.S. citizens and residents residing both within and outside the United States.
In addition, FATCA imposes compliance, reporting and due diligence obligations on certain foreign financial institutions with respect to financial accounts held directly or indirectly by U.S. persons.
Who Does FATCA Apply To?
FATCA generally applies to:
Individuals holding specified foreign financial assets exceeding applicable reporting thresholds;
Certain Non-Financial Foreign Entities (“NFFEs”); and
Foreign Financial Institutions (“FFIs”).
Individuals
U.S. taxpayers residing abroad may be required to file Form 8938 if the aggregate value of their specified foreign financial assets exceeds certain reporting thresholds.
For example:
individuals filing separately may be required to report where the total value of specified foreign financial assets exceeds USD 200,000 on the last day of the tax year or USD 300,000 at any time during the year; and
individuals filing jointly may be required to report where the total value of specified foreign financial assets exceeds USD 400,000 on the last day of the tax year or USD 600,000 at any time during the year.
Applicable thresholds may vary depending on the taxpayer’s filing status and place of residence.
Specified Foreign Financial Assets
Specified foreign financial assets generally include:
financial accounts maintained by foreign financial institutions;
stock or securities issued by non-U.S. persons;
interests in foreign entities; and
certain financial instruments or contracts where the issuer or counterparty is not a U.S. person.
Certain assets are generally excluded from reporting obligations under Form 8938, including:
directly held real estate;
physical gold held outside a financial account; and
interests in foreign social security or similar governmental programs.
Foreign Financial Institutions
FATCA also requires certain foreign financial institutions to report information concerning financial accounts held by U.S. taxpayers or by foreign entities with substantial U.S. ownership.
To comply with FATCA requirements, participating foreign financial institutions are generally required to undertake due diligence and identification procedures with respect to account holders, comply with reporting obligations, and apply withholding measures in certain circumstances involving non-compliant account holders or institutions.
Failure to comply with FATCA obligations may expose foreign financial institutions to significant withholding consequences on certain U.S.-source payments.
Penalties for Non-Compliance
Failure to report specified foreign financial assets may result in substantial penalties.
For individuals, failure to file Form 8938 may result in an initial penalty of USD 10,000, with additional penalties potentially applying in cases of continued non-compliance following IRS notification.
In certain circumstances, understatements of tax attributable to undisclosed foreign financial assets may also be subject to additional penalties.
Conclusion
FATCA compliance remains an important consideration for U.S. taxpayers residing abroad, foreign financial institutions, and entities with U.S. ownership exposure. Given the complexity of the applicable reporting obligations and the potential consequences of non-compliance, affected individuals and institutions should seek appropriate legal and tax advice.
This publication is provided for general informational purposes only and does not constitute legal or tax advice.