FATCA (Foreign Account Tax Compliance Act)
The Foreign Account Tax Compliance Act (FATCA) is a federal tax law that imposes reporting obligations for U.S. individuals and business entities with foreign financial interests as well as for certain foreign entities. In order to determine an individual’s or organization’s FATCA reporting obligations, it is essential to work with an experienced FATCA tax lawyer.
FAQs: Reporting Foreign Financial Assets to the Internal Revenue Service (IRS)
As Managing Partner of Thorn Law Group, Kevin E. Thorn, has helped hundreds of clients with complicated overseas tax cases and has provided counsel for clients around the world. He is an expert when it comes to FATCA and the implications this legislation has on U.S. taxpayers, both here in the United States and abroad. Below, Mr. Thorn discusses many common issues associated with FATCA compliance and taxpayers’ reporting obligations to the IRS. If you have additional questions and would like to speak with Mr. Thorn directly, you can call 202-349-4033 or email Mr. Thorn at firstname.lastname@example.org. For more information, visit thornlawgroup.com.
1. Understanding Your FATCA Obligations
Q: What is FATCA reporting?
FATCA is United States tax law that was created to reduce offshore tax evasion and fraud. All U.S. Taxpayers must disclose offshore accounts or face fines, penalties and tax liabilities. Moreover, foreign financial Institutions, and certain other non-financial foreign entities, must report on the foreign assets held by their U.S. account holders or be subject to withholding on withholdable payment.
Q: When should FATCA be considered by an individual tax payer?
As stated by the IRS, “U.S. citizens, U.S. individual residents, and a very limited number of nonresident individuals who own certain foreign financial accounts or other . . . specified foreign financial assets must report those assets” using Form 8938. However, individual reporting requirements are subject to certain thresholds which vary based upon country of residence (U.S. or foreign), marital status and other factors.
Q: When should FATCA be considered when dealing with a foreign business, trust or foundation?
Interests in foreign businesses, trusts and foundations are “specified foreign financial assets” that are subject to FATCA’s reporting requirements. The value of the entity’s assets is taken into consideration when determining whether the threshold for reporting is satisfied.
Q: What are the top three items that need to be considered when reporting foreign financial assets to the IRS?
There are numerous important factors involved in reporting foreign financial assets to the IRS. To ensure that you are not unnecessarily exposing yourself to an audit or investigation, it is critical that you carefully adhere to the reporting requirements that are applicable to your particular offshore holdings and financial circumstances. Three of the top issues to consider when preparing to submit Form 8938 are:
- To determine whether you need to file Form 8938, you will need to determine the total value of your offshore holdings as well as the relevant reporting threshold.
- While not all offshore holdings are subject to FATCA reporting, many different types of assets are. This includes (but is not limited to) financial assets, business interests, currency and interest rate swaps, and foreign insurance policies.
- If you fail to accurately report your offshore holdings, you can face steep IRS penalties. Contact Managing Partner Kevin E. Thorn today to discuss your legal options.
Q: What do I do If I receive a letter from my bank concerning FATCA?
Foreign financial institutions are subject to FATCA reporting obligations as well; and, if your overseas bank believes you may be obligated to report assets in its possession to the IRS, it will send you a “FATCA letter.” While this is a standard form letter and receiving one does not necessarily mean that you need to file Form 8938, it is important to take the letter seriously and determine whether you need to file.
Q: Which separate IRS Form needs to be used to report foreign bank accounts (including pensions and insurance accounts) to the IRS?
Form 8938 is the primary form taxpayers must use to report foreign financial assets to the IRS under FATCA. However, if you have already reported these assets on another form, then you do not also need to report them using Form 8938. Other forms that may be used to report certain types of foreign financial assets include:
- Form 3520 (for trusts and foreign gifts)
- Form 3520 A (information return for foreign trusts with U.S. owners)
- Form 5471 (for foreign corporations)
- Form 5472 (for foreign ownership of U.S. corporations and U.S. business activities of foreign entities)
- Form 8621 (for passive foreign investment companies)
- Form 8865 (for foreign partnerships)
- Form 8891 (for registered Canadian retirement savings plans)
- Form 926 (for exchanges and transfers of property involving foreign corporations)
Critically, if you file Form 8938, you may still also need to file an FBAR (Foreign Bank Account Reporting Form) with the Department of Treasury. For more information about the forms used to satisfy the IRS’s foreign financial requirements, you can read: What Are the Foreign Financial Reporting Requirements or Forms That Should Be Filed With the Internal Revenue Service (IRS) for Individuals, Businesses, Trusts and Foundations?
Q: What do I need to know about preparing the FBAR (Foreign Bank Account Reporting Form)?
The FBAR (FinCEN Form 114) is used to report financial interests in, and signature authority over, foreign bank accounts, brokerage accounts, mutual funds, trusts and certain other foreign financial assets. Similar to the reporting requirements under FATCA, the FBAR requirements (which exist under the Bank Secrecy Act) are subject to minimum reporting thresholds. Also similar to FATCA reporting, if you fail to file an FBAR, you can face steep federal penalties.
Q: If I file IRS Form 8938, do I also need to file an FBAR (FinCEN Form 114)?
Maybe, but not necessarily. While FATCA applies to “foreign financial assets,” the Bank Secrecy Act applies to “foreign financial accounts.” If you are required to report a foreign asset other than a financial account, then you may only need to file Form 8938.
Q: Which IRS Foreign Financial Asset Reporting Form needs to be attached to IRS Form 8938?
If you have multiple items to report in Part V or VI of Form 8938, then you will need to make an appropriate number of copies of the continuation statement provided with the form and attach them following page 2.
2. FATCA Reporting for Specific Types of Assets
Q: Do I need to file Form 8938 if I hold foreign financial assets through a U.S. financial institution?
No. The IRS guidance on assets held at foreign branches of U.S. financial institutions states: “If a financial account, such as a depository, custodial or retirement account, is held through a foreign branch or foreign affiliate of a U.S.-based financial institution, the foreign account is not a specified foreign financial asset and is not required to be reported on Form 8938.”
Q: Do I need to file Form 8938 if I have an account with a U.S. branch of a foreign financial institution?
No. A financial account held at a U.S. branch of a foreign financial institution, “is an exception to the general rule that a financial account maintained by a foreign financial institution is specified foreign financial asset,” that must be reported under FATCA. Specified foreign financial assets held in qualifying accounts also do not have to be reported.
Q: Do I need to file Form 8938 if I own real estate abroad?
Real estate holdings are not specified foreign financial assets that are subject to reporting on Form 8938. However, if you own an interest in a foreign business entity, trust, foundation or estate which holds foreign real estate, then the value of the real estate must be considered when determining whether the overall value of your ownership interest exceeds your FATCA reporting threshold.
Q: Are foreign pensions and deferred compensation plans subject to FATCA?
Yes. The IRS advises: “If you have an interest in a foreign pension or deferred compensation plan, you have to report this interest on Form 8938 if the value of your specified foreign financial assets is greater than the reporting threshold that applies to you.”
Q: Is foreign social security income subject to FATCA?
Unlike private pensions and deferred compensation plans, foreign social security income is not subject to FATCA. This includes, “[p]ayments or the rights to receive the foreign equivalent of social security, social insurance benefits or another similar program of a foreign government.”
Q: Is a foreign inheritance subject to FATCA?
Yes, once again, subject to the individual threshold requirements. This applies to your entire interest in a foreign estate as well as any specified foreign financial assets you acquire as a beneficiary. For example, if you inherit foreign stock or securities which you hold outside of a foreign financial account, you must separately report these assets on Form 8938.
3. FATCA and the IRS’s Streamlined Filing Procedures
Q: How do the IRS’s streamlined filing procedures relate to FATCA?
The IRS’s streamlined filing procedures allow taxpayers who mistakenly failed to report their foreign financial assets under FATCA to avoid certain penalties due to non-payment of federal taxes. In order to be eligible to take advantage of the streamlined filing procedures, a taxpayer must be able to, “certify that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part.”
Q: What are the benefits of using the IRS’s streamlined filing procedures?
If you are eligible to submit a streamlined filing, doing so before the IRS initiates an investigation of your foreign financial holdings and filing history can allow you to limit the penalties due as a result of your delinquent filing. Voluntarily addressing your previous failure to file could also help protect you against a civil enforcement action or criminal prosecution.
Q: What are the risks of submitting a streamlined filing for foreign financial assets?
One of the primary risks associated with submitting a streamlined filing is the risk that the IRS will still view your previous failure to file as a willful violation of FATCA. If the IRS determines that you willfully withheld information about your foreign financial holdings, not only could you face prosecution for tax law violations, but you could also face prosecution for submitting false statements with your streamlined filing.
Q: When should an individual filer consider a streamlined filing?
To determine whether it is in your best interests to submit a streamlined filing in order to satisfy your FATCA obligations, you will need to discuss your situation with an experienced federal tax attorney like Managing Partner Kevin E. Thorn. Generally speaking, however, the key question is whether you can adequately substantiate your position that your failure to file Form 8938 was non-willful. If there is a chance that the IRS will accuse you of intentionally failing to report your foreign financial assets despite your certification to the contrary, then submitting a streamlined filing may not be in your best interests.
Q: When should a business, trust or foundation consider a streamlined filing?
The same considerations that apply to individuals also apply to businesses, trusts and foundations. If there is a chance that the IRS will challenge your certification of non-willfulness, then you may need to consider one of the alternatives to streamlined filing.
4. If You are Behind on Your FATCA Reporting Obligations
Q: Is there a threshold for needing to file Form 8938?
Yes, in order to determine whether you must file Form 8938, you must first determine the aggregate value of your specified foreign financial assets. For unmarried taxpayers and married tax payers filing separately who live in the U.S., the threshold is $50,000 on the last day of the tax year, or more than $75,000 at any time during the tax year. These figures double for married taxpayers filing jointly, and they are significantly higher for taxpayers living abroad.
Q: What should I do if I haven’t reported foreign financial assets to the IRS?
If you hold foreign financial assets that you have not reported to the IRS, the first thing to do is to determine whether your foreign financial assets are subject to disclosure under FATCA. Not all foreign assets need to be reported; and, as discussed above, minimum thresholds apply to all taxpayers. If you own specified foreign financial assets which you believe may trigger FATCA’s reporting requirements, you should speak with a federal tax attorney promptly.
Q: What should I do if I am being audited by the IRS due to my foreign financial holdings?
If you are being audited by the IRS due to your foreign financial holdings, you will need to quickly assess whether you have failed to meet your reporting obligations under FATCA. If so, you may need to try to work with the IRS in order to mitigate your liability for interest and penalties. If not, you can present evidence in order to try to prevent an unfavorable audit determination.
If the IRS determines that you have violated FATCA and you disagree, you can file an appeal after you receive the final audit report. In any case, you will also want to take steps to mitigate your risk of facing another audit related to your foreign financial assets in the future.
Q: Can I hire a CPA to deal with the IRS concerning FATCA?
While individual taxpayers can hire a CPA to deal with the IRS concerning FATCA, doing so can be dangerous due to the volume and complexity of the legal issues involved. Instead, taxpayers should engage experienced legal representation. At Thorn Law Group, Kevin E. Thorn regularly represents U.S. residents and non-residents with regard to FATCA compliance, and he can help you overcome any issues you are having with the IRS.
Q: What are my options if I have already been penalized under FATCA?
If you have already been penalized under FATCA, you should discuss your situation with an attorney right away. You may have grounds to file an appeal, and you will want to make sure that you are not presently exposing yourself to additional penalties in relation to your offshore holdings.
5. The Dreaded FATCA Letter and What is FATCA Reporting?
The FATCA legislation became effective on July 1, 2014, and you may have already received a FATCA letter. If so, your assets at the foreign institution may have already been frozen or cancelled. You will need to show proof that you have complied with the FATCA requirements for filing.
The good news is that we can help. The international tax attorneys at Thorn Law Group have the knowledge necessary to help navigate clients through the complex reporting requirements imposed by FATCA. As former IRS attorneys, our skilled legal team has a keen understanding of the tax laws and regulations designed to control and monitor offshore bank accounts and other foreign property and assets.
6. We Have Already Helped Over 500 Clients with These Issues
If you want an immediate consultation, call us at 202-349-4033. If you want to know more about FATCA, please keep reading our frequently asked questions or visit our short page about FATCA here. For additional information, visit thornlawgroup.com.
7. Do you Qualify? What Taxpayers Need to Have a FATCA Report?
Specifically, FATCA requires taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 to disclose those assets on Form 8938, Statement of Specified Foreign Financial Assets. This form must be attached to the taxpayer’s annual federal income tax return. Higher asset thresholds apply to U.S. taxpayers who file a joint tax return or who reside abroad.
If you meet the below requirements, you must file Form 8938:
- You are a U.S. taxpayer (any individual who is required to file income tax) living domestically or abroad
- Resident alien
- Non-resident alien who either 1) files a tax return or 2) is a bona fide resident of American Samoa or Puerto Rico
- U.S. taxpayer living abroad with either domestic or foreign-sourced income
- You have assets held in foreign accounts or issued by foreign institutions or individuals; foreign financial assets or investments not held in an account; foreign-sourced income; or interest in a foreign entity
Financial Institutions will also look for U.S. indicia including:
- S. citizenship or U.S. residence
- S. place of birth
- S. address including U.S. PO boxes
- S. telephone number
- Repeating payment instructions to pay amounts to a U.S. address or an account maintained in the U.S.
- Current power of attorney or signatory authority granted to a person with a U.S. address
- In care of or hold mail address which is the sole address for the account holder
8.What Do You Need to Disclose?
FATCA Types of Accounts Required to Disclose
The following types of foreign assets, income and accounts are required to be disclosed:
- Financial assets held in or maintained by a financial institution or a broker-dealer outside the U.S., including fluid assets held in personal or business checking, savings and brokerage accounts overseas
- Financial assets not physically held in an account, including non-liquid assets and securities such as bonds, notes or physical stock issued by a foreign person
- Financial assets held in overseas companies or issued by foreign corporations, including Controlled Foreign Corporations (CFCs) and Passive Foreign Investment Companies (PFICs)
- Partnership interest in an overseas partnership
- Overseas investment accounts, such as mutual funds and retirement savings accounts and plans
- Investment sale agreements or money-saving agreements entered into with a foreign issuer, such as currency swaps, interest rate swaps, commodity swaps, and interest rate caps
- Foreign-held trusts and estates
- Non-U.S. insurance policies or annuities with a cash-surrender value
- Personal and business income earned outside the U.S., including foreign pension and deferred compensation plans
Even if you do not have any U.S.-based income, if you qualify, you need to file a FATCA. Now, what qualifies for types of income?
9. What are the Limits on Disclosure?
The aggregate value of your specified foreign financial assets is more than the reporting thresholds that applies to you:
- Unmarried taxpayers living in the U.S.: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year
- Married taxpayers filing a joint income tax return and living in the U.S.: The total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year
- Married taxpayers filing separate income tax returns and living in the U.S.: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
- Taxpayers living abroad. You are a taxpayer living abroad if:
- You are a U.S. citizen whose tax home is in a foreign country and you are either a bona fide resident of a foreign country or countries for an uninterrupted period that includes the entire tax year, or
- You are a U.S. citizen or resident, who during a period of 12 consecutive months ending in the tax year is physically present in a foreign country or countries at least 330 days.
- If you are a taxpayer living abroad you must file if:
- You are filing a return other than a joint return and the total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year; or
- You are filing a joint return and the value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.
10. Why Do You Need to Have a FATCA Report?
Taxpayers who fail to report these specified foreign financial assets will face a $10,000 penalty and any underpayments associated with the non-disclosed assets will be subject to a 40 percent penalty. Obviously these are hefty penalties and you need to consult with an experience tax attorney to see if you qualify for a FATCA disclosure.
Moreover, if the IRS believes this was willful, then they will launch a criminal investigation which can lead to seizures and prison. In fact, in March 2011 two individuals were sentenced to 10 years in prison for concealing $150 million in assets.
11. What is a FATCA Withholding?
The Foreign Account Tax Compliance Act (FATCA), which was passed as part of 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.
12. Compliance with FATCA
While there really two common ways to comply with FATCA: OVDP (Offshore Voluntary Disclosure Program and Streamlined Offshore Disclosure (Domestic and Foreign). Typically, OVDP is used for those who are Willful and Streamlined for those who are non-willful.
They are listed below in more detail. Before you decide whether Streamlined or OVDP is the right choice, you should talk with Kevin Thorn, a DC tax attorney, to find out which option is likely to have the best results for you.
13. OVDP (Offshore Voluntary Disclosure Program)
On January 9, 2012, the IRS introduced the reopening of its Offshore Voluntary Disclosure Program for Undisclosed Offshore Accounts! To enter this program taxpayers with undisclosed accounts must file a Voluntary Disclosure.
Voluntary disclosures are extremely sensitive and complex and they are subject to strict rules and guidelines. Once taxpayers are accepted into the voluntary disclosure program, they must provide the IRS with full cooperation while their case is being reviewed. Thus, a taxpayer's eligibility for this program must be carefully evaluated prior to contacting the IRS. Generally, the IRS’s Voluntary Disclosure policy applies to a taxpayer who:
- Completely and voluntarily informs the IRS of his tax violations;
- Had income from only legal sources;
- Makes the disclosure prior to being informed that he is under criminal investigation;
- Files a correct tax return or cooperates with the IRS in ascertaining his correct tax liability; and
- Makes full payment of the amount due, or if unable to do so, makes arrangements to pay.
The Program is not just for individuals. Corporations, partnerships, trusts, and other entities are eligible to participate in the IRS Voluntary Disclosure Program.
Time is of the essence - Once the IRS opens an examination of a taxpayer, that taxpayer is no longer eligible to disclose under the Voluntary Disclosure Program. Thorn Law Group has the civil tax law experience to help you get back into compliance with the IRS through the Voluntary Disclosure Program.
14. Streamlined Domestic and Foreign Offshore Disclosure
Streamlined Filing Compliance Procedures were recently introduced to prompt taxpayers to submit amended returns and to file original returns, which were supposed to be filed but weren't. Tax returns submitted under the Streamlined Filing Compliance Procedures have to report income from foreign sources, income from U.S. sources, and deductions for applicable tax years.
Streamlined filing is different from the Offshore Voluntary Disclosure program because you have to certify that the failure to follow tax rules was not willful, but instead happened because of negligence or mistake. Willful violators cannot take advantage of Streamlined filing but can take advantage of OVDP.
If you are non-willful, then you may use the streamlined program. You will need to amend your prior three years of tax returns and file FBAR reports for the prior six years. The good news is that there will be no penalty assessed on the assets abroad.
While this sounds like a good deal for U.S. taxpayers, it is important to realize that the Streamlined Compliance rules don't limit civil penalties which could arise due to reporting income from U.S. sources. Streamlined Compliance also does not necessarily protect taxpayers from criminal prosecution if their actions were found to be in violation of the tax law. OVDP, on the other hand, can provide protection from criminal prosecution but financial consequences can be dire.
Streamlined Domestic Offshore Disclosure
If you are a United States taxpayer who resides in the United States then you use the Domestic program
Streamlined Foreign Offshore Disclosure
For nonresident taxpayers who are also non-willful, the streamlined program is available.
Make Sure You Are Non-Willful
Taxpayers using either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures, will be required to certify, in accordance with the specific instructions set forth below, that the failure to report all income, pay all tax and submit all required information returns, including FBARs (FinCEN Form 114, previously Form TD F 90-22,1) was due to non-willful conduct.
What is Non-Willful?
Non-willful conduct is defined as “negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law. Willfulness is available via evidence, since it is a state of mind. It is usually drawn based on a reasonable conclusion based on the facts.
Moreover, You Must Provide a Non-Willful Conduct “Narrative” Statement
“Any submission that does not contain a narrative statement of the facts will be considered incomplete and will not qualify for streamlined penalty relief.”
15. Other Risky Ways to Comply with FATCA?
In addition to the ODVP and Streamlined program, there are two riskier methods to complying. Typically, we do not recommend these methods.
One is the reasonable cause statement where an attorney will amend your prior returns and draft a persuasive letter and necessary forms. This is still a riskier method than the ODVP or Streamlined Disclosure.
Moreover, an even riskier method is the quiet disclosure statement. This is where you simply amend your prior returns. We do not recommend the quiet disclosure statement as you are violating U.S. law.
16. How is the IRS Finding Offshore Accounts and Related Tactics for Compliance and Reporting
In addition to FATCA, The IRS is using various tactics to track down offshore funds:
- TIE - Tax Information Exchange Agreements
- MLAT - Mutual Legal Assistance Treaties
- Subpoenas - A new tactic to get people to incriminate themselves.
- Customs Hold - This area of international tax noncompliance remains an area of concern for the IRS. So if the individual has delinquent taxes, the IRS can put a customs hold on your passport using the TECS system.
17. Do Financial Institutions Report on Me?
Yes, in addition to individuals, FATCA also requires foreign financial institutions (FFI) to report information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest, directly to the IRS. In order to comply with FATCA, FFIs must enter into special agreements with the IRS that set forth specific obligations and procedures for the FFI.
18. What is an FFI? What is FATCA Banking?
An FFI is a foreign financial institution.
- Any foreign entity that accepts deposits in the ordinary course of banking or a similar business such as banks and credit unions.
- Holds financial assets for the account of others as a substantial portion of its business such as brokerages or custodians.
Examples from the IRS include:
- Depository institutions (for example, banks)
- Custodial institutions (for example, mutual funds)
- Investment entities (for example, hedge funds or private equity funds)
- Certain types of insurance companies that have cash value products or annuities
19. You Need a FATCA Lawyer
If you need help, please contact us for a consultation. The international tax attorneys at Thorn Law Group have the knowledge necessary to help navigate clients through the complex reporting requirements imposed by FATCA. As former IRS attorneys, Kevin E. Thorn and his skilled legal team has a keen understanding of the tax laws and regulations designed to control and monitor offshore bank accounts and other foreign property and assets. As a Managing Partner, Mr. Thorn has helped hundreds of clients with complicated overseas tax cases and has provided counsel for clients around the world. He is an expert when it comes to FATCA and the implications this legislation has on U.S. taxpayers, both here in the United States and abroad. Thorn Law Group has already helped over 500 clients with these issues. If you would like an immediate consultation, call Kevin E. Thorn at 202-349-4033 or email him at email@example.com. For more information, visit thornlawgroup.com.