FATCA Repeal: What It Means for U.S. Taxpayers Abroad

The Foreign Account Tax Compliance Act (FATCA) has frustrated many U.S. taxpayers living abroad since its enactment in 2010. Designed to combat tax evasion, FATCA requires foreign financial institutions to report accounts held by U.S. citizens, leading to banking difficulties and increased compliance burdens. Many expatriates argue that the law unfairly penalizes ordinary Americans rather than wealthy tax evaders.

Discussions about repealing or modifying FATCA continue, with potential changes that could ease reporting requirements, reduce compliance costs, and alter how the U.S. interacts with foreign banks and governments on tax matters.

Legislative Proposals for Repeal

Efforts to repeal FATCA have gained traction, with lawmakers introducing multiple bills aimed at eliminating or scaling back its requirements. One of the most notable attempts was the “Repeal FATCA Act,” introduced in various forms since 2017. Supporters argue that FATCA infringes on privacy and imposes excessive burdens on Americans overseas, particularly middle-class expatriates who struggle to maintain bank accounts as foreign institutions close U.S.-linked accounts to avoid compliance costs.

Opponents contend that FATCA has increased tax compliance and deterred offshore tax evasion, pointing to billions of dollars in previously undisclosed assets that have been reported since its implementation. Some lawmakers propose modifying FATCA rather than repealing it entirely, suggesting exemptions for certain account types or raising reporting thresholds to reduce the burden on ordinary taxpayers while maintaining enforcement capabilities.

Exempt Accounts and Reporting Thresholds

FATCA’s reporting requirements vary based on filing status and residency. U.S. taxpayers living abroad must file Form 8938 if their foreign financial assets exceed $200,000 at year-end or $300,000 at any point during the year for single filers. Married taxpayers filing jointly face doubled thresholds. For those residing in the U.S., the limits are significantly lower—$50,000 at year-end or $75,000 at any time for single filers.

Certain foreign accounts are exempt from FATCA reporting. Retirement accounts such as Canadian Registered Retirement Savings Plans (RRSPs) and similar pension funds in other countries often receive exemptions due to tax treaties. Foreign social security–type programs are also generally excluded, preventing unnecessary duplication of reporting for government-administered benefits.

Foreign financial institutions must also adhere to FATCA reporting thresholds, typically disclosing accounts exceeding $50,000. However, banks in jurisdictions with intergovernmental agreements (IGAs) may have different thresholds or exemptions based on local regulations. Some countries negotiated higher limits for low-risk accounts, such as those used for everyday banking, reducing the number of accounts subject to automatic reporting. These variations lead some expatriates to restructure their holdings to remain below reporting limits.

Enforcement and Collection Protocols

FATCA enforcement relies on cooperation between the IRS and foreign financial institutions, with significant penalties for noncompliance. Banks that fail to report U.S.-linked accounts face a 30% withholding tax on certain U.S.-sourced payments, including interest and dividends. To avoid penalties, many banks have opted to close accounts held by U.S. citizens, making it difficult for expatriates to access basic financial services.

For individual taxpayers, failure to comply with FATCA reporting obligations can result in severe financial consequences. The IRS imposes a $10,000 penalty for failing to file Form 8938, with additional fines reaching up to $50,000 for continued noncompliance. If the IRS determines that assets were intentionally concealed, penalties can escalate to 40% of the unreported amount. Unlike the Foreign Bank Account Report (FBAR), which carries potential criminal charges for willful violations, FATCA penalties are primarily financial but still pose a significant burden.

The IRS relies on bilateral agreements and tax treaties to request assistance from foreign governments in collecting unpaid taxes and penalties. While the U.S. generally does not have the authority to seize assets in foreign jurisdictions, countries with Mutual Collection Assistance provisions, such as Canada and France, may help enforce certain tax debts. However, enforcement varies widely, with some nations refusing to assist in collection efforts for U.S. tax liabilities.

Interplay With Citizenship-Based Tax Requirements

FATCA operates within the broader framework of the U.S. citizenship-based taxation system, which requires all citizens and green card holders to report worldwide income regardless of residency. Unlike most countries that tax individuals based on residency, the U.S. mandates annual tax filings for expatriates, often leading to double taxation concerns and complex compliance obligations.

The Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC) offer some relief but do not eliminate filing requirements. The FEIE allows qualifying taxpayers to exclude up to $126,500 in foreign-earned income for the 2024 tax year, while the FTC offsets U.S. tax liability with taxes paid to foreign governments. However, these provisions do not exempt individuals from FATCA-related disclosures, meaning even those with no U.S. tax owed must still file extensive paperwork. The compliance burden is particularly significant for self-employed individuals, as they remain subject to U.S. self-employment taxes, which cannot be mitigated by the FTC.

Interaction With Bilateral Tax Treaties

FATCA’s implementation has been shaped by bilateral tax treaties and intergovernmental agreements (IGAs) that dictate how foreign governments cooperate with the U.S. in enforcing its reporting requirements. Many countries have signed Model 1 IGAs, which require financial institutions to report U.S.-linked accounts to their own tax authorities, which then share the information with the IRS. Others have adopted Model 2 IGAs, allowing direct reporting to the IRS with certain local safeguards. These frameworks influence how FATCA operates in different jurisdictions and affect the level of scrutiny applied to U.S. expatriates’ financial accounts.

Some tax treaties mitigate FATCA’s impact by preventing double taxation and recognizing foreign retirement accounts. For example, the U.S.-U.K. tax treaty ensures that British pension plans are not subject to immediate U.S. taxation, while similar agreements exist with Canada, Australia, and several European nations. However, these treaties do not override FATCA’s reporting requirements, meaning that even tax-exempt accounts may still need to be disclosed. In certain cases, treaty benefits must be actively claimed on a U.S. tax return, adding another layer of complexity for expatriates. Countries without robust tax treaties with the U.S. often provide fewer protections, leading to stricter enforcement and greater financial uncertainty for affected individuals.