FATCA and Its Effect on US Expats
The one word no US expat wants to hear, of course, is the dreaded F-word.
No, not that one, get your mind out of the gutter. The F-word, in this case, is actually an acronym. FATCA—formally the Foreign Account Tax Compliance Act—is a law passed by the US Congress and signed by President Barack Obama in 2010 as part of the 2010 economic-stimulus bill, the “HIRE (Hiring Incentive to Restore Employment) Act” (got to love these Washington abbreviations). Since then, FATCA has become a punching bag by US-expat-advocacy groups, as well as a symbol of American overreach and extra-territorial meddling. It has also reaped approximately $8 billion in extra revenue for the treasury since its implementation.
However, like much of US law, misconceptions abound about the nature of FATCA, what it does, and what it doesn’t do. Here at CPAs For Expats, we dislike misconceptions very much. Let’s take a trip down the rabbit hole, and see where we end up in the Wonderland of the tax code, shall we?
History of FATCA
The United States has always taxed its citizens on worldwide income and has required reporting of foreign financial assets on the Foreign Bank Account Report (FBAR) since the passage of the Bank Secrecy Act in 1970. However, it was very difficult for the IRS to enforce these laws, given that there was no way to check what, indeed, Americans were holding in their accounts offshore, especially in secrecy-heavy countries such as Switzerland, the Cayman Islands, Israel, and Ireland.
By the mid-2000s, some members of Congress felt that the situation was spinning out of control. According to economist Gabriel Zucman in his 2015 book The Hidden Wealth of Nations, Americans were holding $1.2 trillion in offshore accounts, thus depriving the IRS of $36 billion of tax revenue every year. Something had to be done, and Senator Max Baucus (Democrat of Montana) and Representative Charles Rangel (Democrat of New York) presented FATCA to the 111th Congress in 2009. It was eventually passed as an amendment to the HIRE Act on March 17, 2010, and was signed by President Obama the next day.
Provisions of FATCA
Some provisions of FATCA have more relevance than others in the day-to-day lives of US expats. We will touch on what I feel are the major ones.
FATCA for Foreign Financial Institutions
FATCA requires that “foreign financial institutions” (FFIs—essentially, banks and investment companies outside the United States) that do business with US citizens or Green Card holders to identify their American customers and report the customers’ names, addresses, Social Security numbers, and account information back to the IRS.
To implement this requirement, the United States has entered into intergovernmental agreements with more than 100 countries, wherein those countries incorporate FATCA into their own legal systems, enabling them to share their residents’ financial information with the IRS, sometimes in exchange for American banks reciprocating that same information to the other country about its own citizens in the US.
Practically speaking, this is why anyone with even a hint of an American accent who walks into a bank virtually anywhere in the world is immediately presented with IRS Form W-9, “Request for Taxpayer Identification Number and Certification” during the account opening process—the W-9 provides the foreign bank with all of the vital information it needs to hand the IRS in case it is ever asked.
US payors doing business with non-US persons
Under FATCA, Americans doing business with nonresident aliens are required to withhold tax from any reportable transaction at the rate of 30%, unless the payee claims a lower rate under a tax treaty using Form W-8BEN. Withholding is then reported to the payee at the end of the year on Form 1042-S (for investment companies), Form 8805 (for partnership entities), or Form 8288-A (for real estate transactions). The payee must then report the income on Form 1040NR.
FATCA for US expats
Now, to the real issue for most people reading this—what does FATCA mean for me?
The most obvious effect of FATCA on the average US expat is the requirement to file Form 8938 if the taxpayer’s foreign assets are above a certain threshold. Form 8938 is similar to the FBAR in many respects, but there are many important differences.
The first difference between Form 8938 and the FBAR is the reporting threshold. As we mentioned earlier, the FBAR reporting threshold is $10,000—if your foreign accounts are above that amount, you need to submit an FBAR. Form 8938’s requirements are a bit more forgiving.
For Americans living outside the US, unmarried filers need to submit Form 8938 if their offshore assets are $200,000 on the last day of the year or $300,000 at any point during the year. The thresholds are doubled for married taxpayers filing jointly. Taxpayers in the US with offshore accounts have to file Form 8938 at a much lower threshold—starting at $50,000 for a single filer.
Not all foreign financial assets are subject to reporting on Form 8938. Some notable exceptions:
If you do not have to file a tax return based on your income, you don’t have to file Form 8938
Financial accounts at foreign branches of US banks or at US branches of foreign banks do not have to be reported on Form 8938
Foreign assets that are being reported on other forms do not need to be reported on Form 8938. Some examples:
Foreign trusts reported on Form 3520
Foreign corporations reported on Form 5471
Foreign partnership interests reported on Form 8865
Passive foreign investment companies (PFICs) reported on Form 8621
Accounts over which you have signatory authority but no financial interest in are reported on the FBAR, but not on Form 8938
FATCA Myths and Truths
As I mentioned earlier, FATCA is the subject of much criticism by the US expat community—some justified, some not. Let’s separate the myths from the truth, lightning round style:
Myth: Repealing FATCA will mean the US will give up “citizen-based taxation” (CBT) and will then only require US residents to file returns.
Truth: The US taxed its citizens all over the world before FATCA was passed. FATCA just makes it harder to avoid the long arm of the IRS.
Myth: Without FATCA, I wouldn’t have to file the FBAR.
Truth: The FBAR requirements have been around since the 1970s. In addition, the FBAR and 8938 have different requirements, and they go to different parts of the Treasury department.
Myth: Because I am filing Form 8938, I don’t have to file the FBAR.
Myth: FATCA increases the tax I will have to pay to the US.
Truth: FATCA is only a reporting requirement, similar to the FBAR. It does not increase your tax bill.
Myth: The Trump tax reform bill eliminated FATCA/FBAR reporting/CBT and therefore the CPAs for Expats guy should leave me alone.
Truth: While the Tax Cuts and Jobs Act (TCJA) did many things, repealing FATCA and CBT was most definitely not among them.
As seems to happen often in this space, let’s go into a few Debbie Downer scenarios for those of you who are still resisting the forceful arm of the IRS intruding into the otherwise-peaceful lives of otherwise-law-abiding US expats. What’s the worst that can happen, right? Well, here are a couple of possibilities:
Frozen bank accounts: Let’s start off with a scenario I have seen multiple times: A US expat walks into her bank and sits down at a loan officer’s desk and makes small talk about family. She mentions that her nephew lives in the United States and she is going to his wedding. The banker, in a flash of inspiration, asks, “Are you a US citizen?” and shoves a W-9 in front of her. If she signs the W-9, the IRS will know about her foreign bank accounts, which she hasn’t been reporting. If she doesn’t sign the W-9, the bank will probably freeze her accounts.
Penalties: Failure to file Form 8938 could result in a $10,000 penalty for a first-time violation, a $50,000 penalty for subsequent violations, and a 40% penalty if you owe tax because of income from an unreported 8938 account.
How to Get into Compliance with FATCA
If this is the first time you’ve heard about FATCA, and you think that you should have been including Form 8938 on your returns, you can use the Streamlined Filing Compliance Procedures to get current. Filing under the Streamlined procedures (if you are eligible) eliminates the risk of penalties, and sets you up going forward for timely compliance every year.
As you can see, while FATCA isn’t exactly the kindest legislation where US expats, it wasn’t written by the Inquisitorial Squad in order to rob you of your foreign checking accounts. Keeping up to date on the latest developments is the easiest way to stay compliant, and CPAs For Expats is here with you every step of the way.
Worried about getting into FATCA compliance? Contact CPAs For Expats and let’s get started!