HR 2847 FATCA: What Taxpayers Need to Know

The Hiring Incentives to Restore Employment (HIRE) Act, or H.R. 2847, was signed into law in 2010. A significant part of this legislation is the Foreign Account Tax Compliance Act (FATCA), a law designed to combat offshore tax evasion by increasing transparency. FATCA requires U.S. citizens and residents to report their foreign financial assets and mandates that foreign financial institutions disclose information about their U.S. account holders to the Internal Revenue Service (IRS).

The intent of FATCA is to ensure that U.S. persons meet their tax obligations on income from foreign sources. It establishes a framework for the automatic exchange of information between the IRS and financial institutions around the world. This system makes it more difficult for individuals to conceal assets and income in offshore accounts. The law affects both individual taxpayers and the global financial industry.

Reporting Obligations for U.S. Taxpayers

FATCA’s reporting requirements apply to “specified individuals,” which includes U.S. citizens, resident aliens of the United States, and certain non-resident aliens. Even if you live and work outside the U.S., you may still have an obligation to report your foreign financial assets. Who must file is based on monetary thresholds that vary by tax filing status and residency.

For specified individuals living in the U.S., reporting is required if the total value of your foreign financial assets exceeds certain amounts. A single individual or someone married filing separately must file if their foreign assets are valued at more than $50,000 on the last day of the tax year, or more than $75,000 at any point. For married couples filing a joint return, they must file if their combined foreign assets exceed $100,000 on the last day of the tax year or $150,000 at any time during the year.

The reporting thresholds are higher for U.S. taxpayers who live abroad. A single taxpayer living outside the U.S. must file if their foreign financial assets are valued at more than $200,000 on the last day of the tax year or exceed $300,000 at any point. For married couples filing jointly and living abroad, the thresholds increase to $400,000 on the last day of the tax year or $600,000 at any time during the year.

The FATCA rules are tied to your annual income tax return. If you are not required to file a tax return for a given year, you are not required to file under FATCA for that year. The responsibility for determining whether you meet the filing thresholds rests with you.

Required Information and Form 8938

To comply with FATCA, taxpayers must file Form 8938, Statement of Specified Foreign Financial Assets. This form is attached to your annual income tax return, such as Form 1040. The form requires you to provide specific details about the foreign financial assets you hold if their total value exceeds your applicable reporting threshold.

“Specified foreign financial assets” are broad and include more than just bank accounts. These assets encompass foreign bank and brokerage accounts, foreign stocks and securities not held in a U.S. account, and interests in foreign entities like partnerships or trusts. For each reportable asset, you must provide the name of the foreign financial institution, the account number, and the maximum value of the account during the tax year.

Distinguishing Form 8938 from FBAR

Taxpayers often confuse Form 8938 with FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Both forms involve reporting foreign financial assets, but they are separate filings with different rules submitted to different agencies. Form 8938 is filed with the IRS as part of your tax return, while the FBAR is filed electronically with the Financial Crimes Enforcement Network (FinCEN).

The reporting thresholds for the two forms are different. The FBAR filing requirement is triggered if the aggregate value of your foreign financial accounts exceeds $10,000 at any time during the year, a much lower threshold than for Form 8938. You may be required to file one form but not the other, or both, and filing Form 8938 does not relieve you of your obligation to file an FBAR.

How Foreign Institutions Comply

FATCA’s effectiveness relies on the cooperation of foreign financial institutions (FFIs). These institutions, including banks, brokerage houses, and certain insurance companies, must enter into agreements with the IRS. Under these agreements, FFIs must identify and report information on financial accounts held by U.S. taxpayers, including their name, address, U.S. Taxpayer Identification Number (TIN), and account balance details.

To facilitate this process, many countries have entered into Intergovernmental Agreements (IGAs) with the United States. These agreements streamline reporting by allowing FFIs to send the required information to their own government, which then exchanges it with the IRS.

The incentive for FFIs to comply is to avoid a significant penalty. Institutions that do not enter into an agreement with the IRS are subject to a 30% withholding tax on certain U.S. source payments made to them. This withholding applies to payments like interest and dividends generated from U.S. financial assets held by the non-compliant institution.

You may be asked by your foreign bank to provide documentation to verify your U.S. tax status. This is a standard part of their due diligence process to comply with FATCA. Providing this information helps the institution meet its obligations and ensures you are not incorrectly identified as a “recalcitrant account holder,” which could lead to withholding on your accounts.

Penalties for Non-Compliance

Failing to meet your FATCA reporting obligations can lead to significant penalties. The IRS can impose a $10,000 penalty for failing to file a correct and complete Form 8938 by the due date. This penalty can be applied even if the failure to file does not result in any underpayment of tax.

If you receive an IRS notice regarding your failure to file and continue to not comply, penalties can increase. An additional penalty of up to $50,000 can be assessed for continued failure to file after receiving an IRS notice. This accrues at $10,000 for each 30-day period of non-compliance after the initial notice period, up to the $50,000 maximum.

Beyond failure-to-file penalties, accuracy-related penalties can apply if you underpay taxes due to undisclosed foreign financial assets. A 40% penalty can be applied to the portion of any tax underpayment attributable to an asset that should have been reported on Form 8938. In cases of willful non-compliance, criminal penalties may also be considered.