Laying out FATCA basics for you
The Foreign Account Tax Compliance Act (FATCA) was enacted by the Congress in 2010. The act basically targets all US tax payers, those who are residents, and those who are expats, to report to the IRS all of the foreign accounts, assets, or entities they hold in any foreign country.
Tax payers must therefore, duly report their assets to the IRS by filling out the form 8938 and submitting it along with the income tax return. Moreover, FATCA also requires the financial institutions of different countries such as banks, mutual funds, insurance and investment vehicles, and brokers and dealers, to report particular information that they have, related to US taxpayers. It also asks foreign entities to reveal details about ownership interests that US expats hold with them.
Essentially, FATCA was enacted to actively deal with non-compliance incidences of US expats, who held accounts in foreign financial institutions. Thus, all US expats are required to report the foreign interest that they earn when they submit their income tax return.
Since the FATCA came into effect, IRS computers receive information about accounts of different US taxpayers. They use the information they receive to reconcile it against the tax returns reported by the US taxpayers. This enables them to spot delinquent taxpayers automatically.
Who must file Form 8938, Statement of Specified Foreign Financial Assets?
All US citizens, whether resident aliens or non-resident aliens of Puerto Rico or American Samoa, are required to report their assets in From 8398 to the IRS, under FATCA.
Additionally, US taxpayers living in a foreign country must also file a return, along with a joint return. This is necessary if the combined value of all the foreign assets that they hold is greater than $200,000 at the last day of the tax year, or greater than $300,000 at any point in time during the entire tax year.
On the other hand, if the foreign assets held by US expats have a value greater than $400,000, on the very last day of the tax year, or have a value that is greater than $600,000, then they are required to file a joint return only.
Determining the value of foreign assets
The value of foreign assets that has to be reported to the IRS must be in dollar terms. US expats must find out the fair market value of all the assets that they hold abroad, and convert it according to the exchange rate that is prevalent at the end of the tax year.
If you are a US taxpayer, and you fail to truly disclose the fair value of all your assets, you might be penalized up to $10,000. Moreover, in case the IRS informs you of a failure to disclose, then you can be penalized $30,000 for each of the 30 days that you don’t file. This may make you liable for criminal penalties too. In addition, if you understate any of your taxes on the assets that you fail to disclose to the IRS, a 40% penalty will be charged on those understated taxes as well. Hence, be very cautious when you file for returns, and disclose all of your assets, at their correct market value.
Don’t forget that the Form 8398 is due on the date when the income tax returns are filed. If you have any questions regarding the FATCA or your tax filing process, feel free to contact us.