FATCA Fundamentals: Navigating the Foreign Account Tax Maze

Have you ever dreamed of living abroad, inheriting a villa in Italy, or expanding your business internationally?

While these scenarios may sound exciting, they come with a complex web of tax obligations that many Americans are unaware of.

If you’re a ‘U.S. taxpayer’ with foreign financial interests of $50,000 or more, the Foreign Account Tax Compliance Act (FATCA) is likely to be a critical part of your tax responsibilities.

Whether you’re an expat, an heir to foreign assets, or a business owner going global, understanding FATCA could save you from significant headaches and potential penalties down the road.

FATCA At-A-Glance

Enacted in 2010, FATCA requires U.S. taxpayers to report foreign financial accounts and assets exceeding certain thresholds.

For U.S. residents, single filers must report if foreign financial assets exceed $50,000 at year-end or $75,000 at any point during the year. Married couples filing jointly must report if assets exceed $100,000 at year-end or $150,000 at any point.

For U.S. taxpayers who reside overseas, the thresholds are higher: Single filers must report if foreign financial assets exceed $200,000 at year-end or $300,000 at any point, while married couples filing jointly must report if assets exceed $400,000 at year-end or $600,000 at any point.

Under FATCA, U.S. citizens, resident aliens, and certain non-resident aliens who are considered U.S. taxpayers must file Form 8938 (Statement of Specified Foreign Financial Assets) with their annual tax returns if their foreign financial assets exceed their respective reporting threshold.

Note that FATCA doesn’t just affect individual taxpayers. It also requires foreign financial institutions to report to the IRS when U.S. taxpayers hold foreign financial accounts or substantial ownership interest in a foreign entity.

Many countries have signed Intergovernmental Agreements (IGAs) with the U.S. to facilitate FATCA compliance. Foreign banks in countries with IGAs are required to comply with FATCA to meet local regulatory requirements. Non-compliance can lead to issues with local regulators and complicate the banks’ operations in those jurisdictions. While non-compliance may initially seem to save on compliance costs, the financial impact of withholding taxes and operational disruptions can far exceed the cost of implementing FATCA compliance measures. The banks may face higher costs in the long run due to penalties and restrictions.

This global reach has made FATCA a powerful tool in the U.S. government’s efforts to ensure tax compliance.

If, Then, But…What Do I Have To Report?

FATCA was created to combat tax evasion. While the goals of the legislation are clear, FATCA has some complexities that can leave individuals confused about their reporting obligations.

Here are three common example scenarios when U.S. taxpayers might find themselves grappling with FATCA compliance issues — and how a specialized international tax attorney can help you navigate these challenges.

The Accidental FATCA Non-Filer

Sarah, a 35-year-old software engineer, also a U.S. citizen, has been living in Germany for the past seven years due to her job relocation. She maintains a checking account, savings account, and investment account with a local German bank. The combined value of these accounts has grown to exceed $200,000. Sarah wasn’t aware of FATCA requirements and has never filed Form 8938 with her U.S. tax returns. She e-filed FBAR for some years, but not for each year. She also realized her investment account was not included in her original FBAR filing.

Problem: Sarah has been non-compliant with FATCA for multiple years, potentially facing significant penalties.

A tax attorney can:

• Assess the full extent of Sarah’s foreign financial assets.
• Explain various voluntary disclosure programs and fully discuss each program and its potential consequences with Sarah
• Determine the appropriate disclosure program for Sarah (such as the Delinquent International Information Return Submission program or Streamlined Foreign Offshore Procedures).
• Prepare and file delinquent forms, including Forms 8938, 5471, 3520, and 3520-A, for the required years.
• Amend U.S. tax returns if necessary to report any previously unreported foreign income and calculate the unpaid tax amount due penalties and interest.
• Calculate Miscellaneous Offshore Penalties, if applicable.
• Prepare and e-file all necessary original or amended FBAR forms.
• Draft a taxpayer’s affidavit statement explaining Sarah’s non-willful conduct and surrounding facts and circumstances.
• Submit the package including the prepared documents along with a tax lawyer’s cover letter explaining the entire package and request to process the missing forms safely under the disclosure program.
• Guide Sarah through the disclosure process and help minimize potential penalties.
• Follow up with the IRS until it closes the case.

The Inherited Foreign Assets Case

Mark, a U.S. resident and immigrant from Italy, inherited real property in Italy and some lump sum cash from his late grandmother. The combined value of these assets is approximately $400,000. As a single taxpayer, Mark is unsure about how to report these newly acquired foreign assets for FATCA purposes. He also maintained his foreign bank account in Italy and for his convenience he kept about $58,000 for his occasional family visits.

Problem: Mark needs to properly report his inherited foreign assets to comply with FATCA, but he doesn’t know the reporting requirements and deadlines. He also never reported FBAR or FATCA form as part of his income tax returns.

A tax attorney can:

• Explain reporting requirements for inherited foreign assets above certain values.
• Determine whether Mark needs to file Form 3520, Form 8938, and FBAR based on the value of his inherited assets and his foreign bank account.
• Assist in gathering necessary documentation to accurately report the inherited real property and foreign bank account.
• Prepare necessary forms and a taxpayer’s reasonable cause statement
• Prepare a Delinquent procedure package to submit delinquent forms through the voluntary disclosure program to avoid penalty assessment.
• Follow up with the IRS until the end of the program closure.

The Small Business Owner with Foreign Interests

Jennifer owns a successful e-commerce business in the U.S. As her business grows, she decides to expand internationally, opening a subsidiary in Canada. She sets up a Canadian corporate bank account and acquires a small office space. Over time, the value of her foreign business interests, including the bank account, grows to exceed $150,000.

Problem: Jennifer has overlooked FATCA reporting requirements as her business expanded internationally, potentially putting her at risk of non-compliance.

A tax attorney can:

• Review Jennifer’s foreign business structure and financial accounts.
• Assist in preparing FATCA Form 8938 to report the Canadian bank account and other qualifying assets.
• Advise on any additional reporting requirements related to the foreign subsidiary (e.g., Form 5471).
• Develop a strategy for ongoing compliance as Jennifer’s international business interests continue to grow.

The Green Card Holder with Undisclosed Foreign Accounts

Sudhir, an Indian citizen and U.S. green card holder for 15 years, splits his time between the U.S. and India. He is an executive in finance areas of an IT government-contractor company. He maintains several bank accounts and investments in India, totaling approximately $1.5 million, which he has never reported on his U.S. tax returns or FBARs. Because he is still an Indian citizen, he didn’t realize he was subject to FATCA rules.

Problem: Sudhir has failed to report his foreign accounts for years and is now at risk of severe penalties. Since he is in a position to learn the FATCA policies and related education and experience, he would be held at a higher standard to uphold and follow the tax law. He is already notified by the IRS that he would be under an IRS audit, meaning he can no longer take advantage of voluntary disclosure programs. As such, the IRS may view his non-compliance more harshly, potentially leading to higher fines or even a risk of criminal charges if willful avoidance action is detected.

A tax attorney can:

• Assess the full extent of Sudhir’s non-compliance and potential penalties.
• Determine the best approach for correcting the non-reporting.
• Communicate with the IRS revenue agent who is assigned on the case and submit necessary requested documents and information and negotiate to potentially reduce penalties and avoid possible prosecution.
• Advise on strategies to maintain his green card status

Get Help From A Tax Attorney Who Specializes In Offshore Disclosure

FATCA compliance issues can arise from a variety of circumstances, catching many U.S. taxpayers off guard.

The intricacies of this legislation often surprise even the most diligent taxpayers, leaving them scrambling to understand and meet their obligations.

Tax Attorney Sammy Kim specializes in international tax matters and can provide guidance in these situations.

Sammy can help assess your specific circumstances, determine the appropriate course of action, and guide you through the next steps. Moreover, she can assist in minimizing potential penalties and developing strategies for ongoing compliance as your financial situation evolves.

Remember, it’s always better to address potential FATCA issues proactively rather than waiting for the IRS to initiate contact.

If you find yourself in a similar situation, speak to a qualified tax attorney now to ensure you’re meeting your FATCA obligations and protecting your financial interests.