The Foreign Tax Compliance Act (FATCA) was designed to root out tax evasion by US citizens and permanent residents with certain foreign-based accounts and financial assets. According to the rules of FATCA, US taxpayers may be required to report offshore asset holdings to the Internal Revenue Service (IRS). FATCA reporting must be filed on Form 8938 which is a Statement of Specified Foreign Financial Assets along with a standard US tax return form 1040, typically on April 15 every year, with the extensions available for US taxpayers living abroad on June 15. Failure to comply with FATCA is a serious offence and may incur substantial punitive measures such as fines, and/or criminal charges.
FATCA reporting is a complex issue, and involves specific financial institutions having to report details of financial accounts held by US persons, and/or offshore entities where US taxpayers and permanent residents have an ownership interest. US taxpayers investing funds abroad will often be asked about citizenship for tax reporting purposes. If the aggregate value of foreign-based assets is at least $50,000 +, these assets and all relevant account information must be detailed on Form 8938. Certain exemptions exist, notably those US taxpayers who do not have to file tax returns are not required to file Form 8938. US taxpayers who have received foreign gifts or who have financial interests in offshore entities must list these items on Form 8938 and include them in their annual tax return.
Reportable or Not Reportable on Form 8938
If a US taxpayer has accounts which are held in a foreign financial institution, meeting threshold requirements, these need to be reported on Form 8938. These accounts include brokerage accounts, deposit accounts, checking accounts, savings accounts, et cetera which are held with foreign banks or broker-dealers. US taxpayers holding investments (stocks, bonds, securities) in non-financial accounts, such as with foreign-based brokerages are required to report as much.
Owing to the intricacies of the US tax code, many expats are uncertain about the details of these reporting requirements. CPA Joshua Ashman of Expat Tax Professionals said, ‘Due to the growing global reach of the US government and its Internal Revenue Service (IRS), more and more Americans are coming to the realization that moving abroad did not put a stop to their US tax filing obligations. Even so-called accidental Americans (those born outside the US with US citizenship) are waking up to the reality that the IRS is in hot pursuit of non-filers, armed with severe penalties, including monetary fines and US passport revocation. For this reason, US citizenship renunciations have reached record numbers in recent years.
In this climate of growing tax-related panic, it’s important for non-filers to realize that there are worthwhile solutions for keeping your citizenship and coming into compliance with the IRS, including taxpayer friendly amnesty programs. Expat Tax Professionals has, for instance, helped hundreds of non-filers come back into compliance with no penalties through its most popular amnesty program, the Streamlined Procedures. For accidental Americans who in any event are renouncing or have renounced, the IRS has just introduced a new amnesty program to help file past year returns and tie up any tax loose ends with no tax or penalties. The key for non-filers is to find the solution that’s tailored to the individual’s circumstances.’
Ashman stresses that not all reporting is necessary however, ‘Anyone who holds foreign currency (not in a financial account), a safe deposit box at a foreign bank, antiques, art, jewelry, vehicles, keepsakes and other tangible assets for investment purposes does not have to report these items. Likewise, real estate holdings overseas are not regarded as foreign financial assets for reporting purposes. If the foreign real estate holdings are held through an estate, trust, corporation, or partnership, then a US taxpayer’s interest in that asset is regarded as a specified foreign financial asset and reportable as such.’
What Impact is FATCA Reporting having on US Expatriates?
US expatriates are averse to the tax reporting requirements of FATCA regulations. A recently conducted survey, ‘The Greenback Survey’ polled some 3000 US expatriates on a variety of issues notably renouncing their citizenship and issues related to taxation. During Q1 2019, the State Department reported that 1018 Americans renounced their citizenship. From that number, 250 cited US tax laws as the number one reason for their decision.
FATCA was blamed since it requires the double taxation of Americans living abroad. Stringent reporting requirements necessitate IRS tax filings for all income generated overseas, or gift tax returns, and estate returns. Recently amended legislation in the form of the Tax Fairness for Americans Abroad Act was introduced on December 20, 2018 by Congressman George Holding. This legislation seeks to move away from citizenship-based taxation towards residence-based taxation for individuals.
Under the amended Tax Fairness for Americans Abroad Act of 2018, non-resident citizens are defined as citizens of the US who have a tax home in a foreign country. This citizen must also be in full compliance with US tax law (for the previous 3 years) and must establish a bone fide residence abroad for an entire taxable year or have residence abroad for at least 330 full days during the tax year.
According to the Greenback Survey, some 74% of respondents had never even heard of Holding’s bill. 58% of those surveyed were unsure how tax reform affects their reporting requirements, and 54% of expats were uncertain if they would be paying more or less taxes after the reforms have been implemented. The statistics reflect interesting trends, notably that 7 in 10 expats do not feel that they should be paying taxes to the US government while they’re living abroad, and almost 9 in 10 expats do not feel that they’re being treated fairly by the US government.