FATCA for Individuals – Reporting & Disclosing Foreign Accounts & Assets to the IRS
If you are have Foreign Accounts or Specified Foreign Assets, you may be an Individual required to file FATCA Form 8938 to disclose this information.
FATCA for Individuals is important, and the failure to be in compliance can result in high fines and penalties.
FATCA For Individuals
If you are considered a U.S. Account Holder and you have foreign accounts abroad, chances are you may have heard about FATCA. FATCA Reporting for Individuals is crucial for some U.S. Account Holders to avoid excessive (and unwarranted) IRS Fines and Penalties.
FATCA is the Foreign Account Tax Compliance Act, and it is a law that requires Foreign Banks and other Foreign Financial Institutions to report U.S. account holder information to the United States.
Technically, the United States is also required to report information abroad, but it appears that so far FATCA may be a one-way road.
Nevertheless, if you have Foreign accounts then you may have received notification by email, letter or otherwise from your Foreign Financial Institution (FFI) regarding updating or confirming you U.S. status (aka FATCA Letter)
FFIs take FATCA very seriously, and if you do not report the information the FFIs are requesting from you, the FFI may suspend, freeze, or cancel your foreign bank or investment account — and you can lose access to your own money.
FATCA Filing and Reporting
When it comes to the Foreign Financial Institutions themselves, they have specific reporting requirements in accordance with whichever particular intergovernmental agreement (IGA) the country may have signed with the United States. Some countries have exceptions/exclusions to reporting, such as PPF or other Provident Funds (noting, the exclusions are for the Institution; Individuals still must report their account information, even if the Institution does not need to report)
There are different versions or Models of the IGA Agreement — but this does not really impact the individual and what he or she is required to report.
Rather, the two main issues for individuals are:
- Reporting/Complying with the Foreign Financial Institution requests for information/documentation, and
- Reporting/Complying with the Internal Revenue Service’s requests for information/documentation.
FATCA – Reporting to the Foreign Financial Institution
As to the Foreign Financial Institution, the individual usually will have to certify that he or she is either a U.S. person (W-9) or not a U.S. Person (W-8 BEN). Depending on whether the Account Holder is a US person or not, will determine whether they complete either a form W-9 or W-8 BEN, and submit it to the FFI. Thereafter, the FFI can properly report the account/income information to the United States government. The reason behind this reporting is to track individuals’ income and financial statuses.
In the United States for example, a bank will commonly issue a 1099–INT to show how much interest the account may have earned during the year. While many U.S. Persons are earning income or maintaining assets/accounts abroad, prior to the enforcement of FATCA, FFIs did not issue the same types of forms. Therefore, the IRS would have no idea as to whether the individual earned any income.
If the IRS is unaware if the person earned any income, then the person could get away without properly reporting the foreign income. As a result, the IRS loses out on tax money that would otherwise be due for the income earned by the individual (The United States is CBT – Citizen Based Tax, and not RBT – Resident Based Tax). Whether or not FATCA works, the IRS has the authority to issue very high fines and penalties against individuals who do not properly report under FATCA.
For individuals – whether they live in the United States or abroad — they are required to file a particular form (FATCA Form 8938) alongside their tax return detailing the foreign accounts, assets, investments, which details the specific amounts in each account, along with a breakdown of the different types of income that was earned throughout the year.
Individual FATCA Requirements – Form 8938
Form 8938 is a form that is included alongside a tax return. Unlike the FBAR, which is a similar form, the Form 8938 is submitted directly with your tax return at the time you submit your tax return to the US government.
The form has different threshold requirements depending on whether the filer is Married Filing Jointly (MFJ) or Married Filing Separate (MFS)/single, and/or if the person resides in the United States or is considered a foreign resident. Generally, if you live abroad (outside of the United States) the threshold requirements are higher for the individual to have to file the form. In other words, you need to have more money or specified foreign assets before you would be required to file this form.
In addition, unlike the FBAR in which a person has to report accounts in which they may have no interest in (but have signature authority), generally speaking a person only files the 8938 for accounts or specified assets that they actually have an interest in.
Form 8938 Penalties
As you may or may not be aware, the IRS issues very stiff penalties for individuals who have not properly reported the foreign accounts or assets. The IRS has the authority to issue upwards of $10,000 for violations involving FATCA Form 8938, and penalties can reach as high as $60,000.
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.
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