FATCA Reporting & the IRS
FATCA Reporting: FATCA is the Foreign Account Tax Compliance Act. It requires U.S. persons to report specified foreign financial assets to the IRS on Form 8938. FATCA reporting requires individual and other U.S. Persons to file a Form 8938 with their U.S. tax return.
The FATCA Form 8938 reporting form is due at the same time the tax return is due to the be filed. If a Taxpayer requests an extension for their tax return filing, FATCA reporting on the 8938 form also goes on extension.
The IRS continues its aggressive enforcement of FATCA reporting.
Foreign Account Tax Compliance Act Basics
The FATCA reporting form 8938 was introduced on the U.S. tax return in 2011.
Unlike the FBAR, which has been around for nearly 50-years, FATCA is relatively new. The Foreign Account tax Compliance Act was introduced as part of the HIRE Act.
As provided by the IRS:
“The HIRE act generally requires that foreign financial Institutions and certain other non-financial foreign entities report on the foreign assets held by their U.S. account holders or be subject to withholding on withholdable payments. The HIRE Act also contained legislation requiring U.S. persons to report, depending on the value, their foreign financial accounts and foreign assets.”
The purpose of FATCA Reporting is to reduce offshore tax evasion and dissuade people from trying to hide money offshore in overseas accounts. The rules require U.S. persons to disclose foreign financial accounts and foreign assets.
FATCA has become a harsh reality for millions of people. FATCA reporting impacts millions of U.S. account holders, who now must report foreign assets to the IRS each year on Form 8938.
10 Key Facts about FATCA Reporting
FATCA Reporting is a complex area of law. We tried to simplify the key components that impact U.S. person with an “individual” filing requirement
Deadline to Disclose
The FATCA Reporting Deadline is the same day a person’s tax returns are due to be filed, including extensions. In other words, if a filers receives an extension to file their tax returns, the FATCA filing requirements for Form 8938 also go on extension.
The United States is one of only a handful of countries on the planet the taxes individuals on their worldwide income. What does that mean? It means that whether or not you reside in the United States or in a foreign country, you are required to report all of your US income as well as foreign source income on your U.S. Tax Return.
It also does not matter if the income you earn is tax exempt in a foreign country (PPF or Passive Income earned in many countries), or whether the income you earn in a foreign country was already taxed (although a Foreign Tax Credit or Foreign Earned Income Exclusion may apply, see below). While you may be able to obtain a credit or exemption for the taxes you paid, or income you earned in a foreign country – you are still required to report the income on your US tax return.
Moreover, it should be noted that the foreign passive income you earned is also required to be identified on the FATCA Form 8938 (thresholds vary based on their U.S. Residency Status and/or marital and filing status)
You Must have An Interest in the Account
Another similar form is called an FBAR (Report of Foreign Bank and Financial Account Form). It is a form that is required to be filed by any US person who has ownership, joint ownership, or signature authority over a foreign account or group of accounts that in aggregate had more than $10,000 on any day of the year.
With FATCA Form 8938 (required to be filed by certain taxpayers), the person must have an interest in the account. Therefore, if you merely have signature authority over an account, chances are you may not need to file the form. Moreover, if your name is on the account but you do not have any interest in the account — that is something you should discuss with an experienced international tax attorney before completing the form.
Filing Thresholds Vary
With the FBAR, the $10,000 threshold requirement does not vary. In other words, whether or not you are single, married filing jointly, or reside outside of the United States — the $10,000 threshold is still the same.
The FATCA Form 8938 is different. Not only must you have an interest in the account, but the threshold requirements vary — depending on whether you reside in the United States or in a foreign country, and whether you are married or single.
For example, if you are single or married filing separate and reside in the United States, then the minimum threshold requirement is $50,000 on the last day of the year or $75,000 on any day of the year (if you have less than $50,000 on the last day of the year). In sharp contrast a person filing married filing jointly and residing overseas may have a minimum threshold requirement of $400,000.
Not All Assets are Reported
Unlike the FBAR, which is mainly focused on items such as accounts an insurance policies, FATCA Form 8938 is more comprehensive. It requires reporting for ownership of certain assets, such as an interest in a business or foreign corporation. The level of ownership of the foreign business, partnership, or corporation is important — because you don’t want to duplicate file the form 8938 and other forms (such as 8938 and 5471 or 8621).
Foreign Real Estate can get Complicated
If a person owns foreign real estate, whether or not they report the real estate will generally be determined by whether it earns any foreign income and/or whether the person is making interest or tax payments that they would like to deduct on their US tax return.
Foreign real estate is not directly reported on a FATCA Form 8938. If a person owns an interest in a foreign corporation or business that owns real estate, the ownership interest in the foreign business or corporation is subject to FATCA reporting — but the real estate is not separately identified on its own 8938.
You Have to Report the Income as well
A form 8938 has multiple parts to it, but the introductory part asks the taxpayer to identify whether the accounts or assets listed in the 8938 (or 8938 continuation form) generates any income. If it does, the individual is required to identify whether the income is capital gains, interest income, dividend income or any other type of income and how much was earned from those accounts.
(This information will also be included on other forms such as his or her Schedule B, Schedule D, Schedule E, or other tax schedule)
When a person receives a foreign gift or foreign trust distribution, they may be required to report it on a form 3520. Beyond FATCA Reporting, a person has to report the receipt of a foreign gift if it exceeds $100,000 in either a single transaction or series of transactions. They have the report the receipt of a foreign gift from a corporation when it exceeds roughly $15,000, and they have to report any trust distribution.
If a is required to report the form 3520 they may not need to file a form 8938 for the same money.
When a person owns a Foreign Trust, they are required to file a form 3520-A. if a person is required to file a form 3520-A for particular foreign trust, they are not required to file a Form 8938 for the identical trust ownership.
Foreign Corporation & Partnerships
The rules are somewhat different for these two forms, but essentially the same (with the 5471 being much more commonplace for U.S. investors). If you own at least 10% ownership in either type of business, you required to report the information on either a form 5471 or 8865. Both of these forms require comprehensive disclosure requirements, involving balance statements, liabilities, assets, etc. Moreover, the forms need to be filed annually, even if a person does not have to otherwise file a tax return
FATCA & PFIC Reporting
One of the most vilified type of financial assets/investments (from the U.S. Government’s perspective) is the infamous PFIC. A PFIC is a Passive Foreign Investment Company. The reason the United States penalized this type of investment is because it cannot oversee the growth of the investment, and/or income it generates. In other words, if a U.S. person invests overseas in a Foreign Mutual Fund or Foreign Holding Company — the assets grows and generates income outside of IRS and U.S. Government income rules and regulations.
As a result, the IRS requires annual disclosure of anyone with even a fractional interest in a PFIC (unless you meet very strict exclusionary rules).
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.
Each case is led by a Board-Certified Tax Law Specialist with 20 years of experience, and the entire matter (tax and legal) is handled by our team, in-house.
*Please beware of copycat tax and law firms misleading the public about their credentials and experience.
Less than 1% of Tax Attorneys Nationwide Are Certified Specialists
Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.
Recent Golding & Golding Case Highlights
- We represented a client in an 8-figure disclosure that spanned 7 countries.
- We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
- We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
- We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
- We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.
How to Hire Experienced IRS 3520 Counsel?
Generally, experienced attorneys in this field will have the following credentials/experience:
- 20-years experience as a practicing attorney
- Extensive litigation, high-stakes audit and trial experience
- Board Certified Tax Law Specialist credential
- Master’s of Tax Law (LL.M.)
- Dually Licensed as an EA (Enrolled Agent) or CPA
Interested in Learning More about Golding & Golding?
No matter where in the world you reside, our international tax team can get you IRS offshore compliant.
Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.