To avoid paying taxes in the United States, US tax payers had a long history of transferring their wealth to countries with very low to no taxes. The Foreign Account Tax Compliance Act was brought into action as a measure to stop this damaging practice throughout the country.
You probably need to adhere to FATCA reporting requirements if you are a US taxpayer or your business is incorporated in the US. A brief explanation of FATCA is provided here so you can learn more about it.
What is FATCA?
The HIRE Act of 2010 included the Foreign Account Tax Compliance Act (FATCA), which was aimed to catch tax fraudsters who were hiding money and assets abroad. For payments made to specific foreign financial institutions and foreign entities, FATCA introduced new information reporting and withholding requirements. The IRS will be able to more easily keep track of US citizens and corporations who get income from investments or deposits in international bank accounts.
What is the FATCA Reporting Requirement?
As a designated US person, you are required by FATCA to disclose the details of all foreign financial accounts and assets when their combined value exceeds a predetermined threshold.
Personal Reporting Thresholds
Your residency, marital status, and filing choices all affect the threshold. Particularly, if you are single and living in the US (or married but filing separate tax returns), you must submit a FATCA report if the combined value of your overseas account and assets exceeds the following thresholds.
- $50,000 on the last day of the relevant tax year, or
- $75,000 at any other time.
If your whole assets are outside the US and you are single (or married but file a separate tax return), you must submit a FATCA report if your assets exceed the following thresholds.
- $300,000 at any moment during the year, or
- $200,000 on the last day of the tax year in question.
The threshold will double if you are married and submit joint tax returns.
Entity Reporting Threshold
If you own a particular domestic entity, it must submit the required FATCA paperwork when the sum of its overseas accounts and assets reaches the:
- $50,000 on the last day of the relevant tax year, or
- $75,000 at any other time.
When and How to File FATCA?
The deadline for submitting such a return is 15th April annually, you must submit Form 8938 and include it with your yearly tax return. You cannot present such a form separately from your tax return, according to the IRS.
FATCA Reporting Exemptions
You do not need to submit Form 8938 for FATCA if you are exempt from filing your tax return with the IRS. Furthermore, you are not required to record some financial assets on Form 8938 if they have already been reported on other forms. However, to prove that the assets have already been disclosed, you must list all these documents in Form 8938.
PENALTIES FOR FATCA NON-COMPLIANCE
A Form 8938 filing error could result in a $10,000 initial fine. The IRS will then have 90 days to get the proper paperwork from you. You will be charged an extra $10,000 for each 30-day term following the conclusion of the initial 90-day period if you fail again. The highest additional fines are $50,000.
If you fail to register certain foreign financial assets and underpay your taxes as a result, you will be fined 40% of the underpayment. The penalty for underpaying taxes through deception is the same as 75% of the underpayment.
Criminal sanctions may be imposed for continued non-compliance. However, if you can show that your failure to file Form 8938 was due to a valid reason, no fines will be applied. You will need to provide enough supporting proof for such a case. On a case-by-case basis, the IRS will evaluate the validity of the cause while taking all relevant circumstances into account.
IMPORTANT FATCA REPORTING FACTS
The due date for disclosure
The FATCA reporting deadline coincides with the deadline for filing tax returns, including extension. In other words, if a filer gets a tax filing extension, the FATCA Form 8938 filing obligations also get a filing extension.
Only a few nations on earth tax citizens based on their worldwide income, including the United States. It implies that whether you live in the US or abroad, you must record all of your US income as well as income from overseas sources on your US tax return.
Additionally, it is irrelevant whether the money you generate is tax-exempt in a foreign nation or whether it has already been taxed in that nation. You must still disclose the income on your US tax return even if you were able to get a credit or exemption for the taxes you paid or income you made abroad. It should also be mentioned that the FATCA Form 8938 requires you to list the overseas passive income you generated.
You Need to Be Active with the Account
An FBAR is another type (Report of Foreign Bank and Financial Account Form). Any US citizen with ownership, joint ownership, or signing power over a foreign account or group of accounts that, taken together, have more than $10,000 on any given day of the year, must submit this form. The person must have an interest in the account while completing FATCA Form 8938. Therefore, it’s possible that you won’t need to file the form if you only have signature control over an account. Additionally, before submitting the paperwork, you should speak with an accomplished international tax attorney if your name is on the account but you have no interest in it.
Filing Thresholds Can Vary
The $10,000 threshold requirement is constant for the FBAR. In other words, the $10,000 level applies regardless of whether you are single, married filing jointly, or living abroad. The reporting obligations under FATCA vary. The threshold requirements differ based on whether you live in the United States or abroad, are married, or are single, in addition to the fact that you must have an interest in the account.
Not every asset is disclosed
FATCA Form 8938 is more detailed than the FBAR, which is primarily focused on items like accounts and insurance policies. Ownership of specific assets, such as a stake in a company or a foreign firm, necessitates reporting. It is crucial to know how much ownership you have in the foreign company, partnership, or corporation because you don’t want to file Form 8938 and other forms twice.
Real Estate abroad can be challenging
If a person owns the international property, whether or not they disclose it generates any foreign income and whether they are making interest or tax payments that they would like to write off their US tax return. A FATCA Form 8938 does not directly request information about foreign real estate. The ownership stake in a foreign corporation or business that owns real estate is subject to FATCA reporting if a person holds it, but the real estate is not specifically named on its own.
You must also report the income
The first section of form 8938 asks the taxpayer to indicate if the accounts or assets mentioned there generate any income. If so, the person must specify whether the income is from capital gains, interest, dividends, or any other source, as well as the amount earned from each account.
Form 3520 and 3520-A
It may be necessary for someone to disclose a foreign gift or foreign trust distribution on form 3520/ 3520-A. There might be a similarity to Form 8938.
Foreign partnerships and corporations
These two types have somewhat different rules, but overall they are the same. Comprehensive disclosure requirements covering financial sheets, liabilities, assets, etc. are necessary for both of these forms. Additionally, the forms must be submitted annually even if a person is not required to file a tax return otherwise.
PFIC and FATCA Reporting
The infamous PFIC is one of the financial asset classes that the US Government despises the most. A passive foreign investment company, or PFIC, is one. Because it cannot monitor the investment’s growth or the money it creates, the United States penalized this kind of investment.
DIFFERENCES BETWEEN FATCA AND FBAR
Do not confuse the FBAR filing obligations with those of the FATCA. There are two distinct types here. Your foreign accounts must also be reported to the local US authority under the Foreign Bank and Financial Accounts Report (FBAR) when their combined value exceeds a certain level.
The first major distinction between FATCA and FBAR is that the former mandates additional reporting on other financial assets, whereas the latter only concentrates on foreign financial accounts. The former has a higher threshold than the latter.
The authorities to which you file the reports represent the second key difference. You must submit Form 8938 to the IRS for FATCA, as was previously mentioned. You must submit FinCEN Form 114 to the Financial Crimes Enforcement Network’s office for FBAR (FinCEN).
Individuals and some domestic companies that are US taxpayers are required to abide by the FATCA reporting obligations. When the combined value of their overseas financial accounts and assets surpasses a certain amount, they are required to report on them. The threshold fluctuates based on several variables.
US-designated people are required to submit Form 8938 along with their annual tax returns to the IRS to meet FATCA filing requirements. Up to $60,000 in fines and other consequences for non-compliance may be imposed.
The Foreign Account Tax Compliance Act (FACTA) is a significant piece of legislation that aims to combat tax evasion by U.S. taxpayers who hold assets in foreign accounts. While FATCA has been successful in increasing transparency and cooperation between countries in the fight against tax evasion, it has also faced criticism for its complexity and compliance burden on FFIs.
Despite these challenges, FATCA remains an important tool for the IRS in detecting and deterring tax evasion by U.S. taxpayers with foreign accounts.