The Foreign Account Tax Compliance Act (FATCA) is an important piece of legislation for anyone who lives internationally or has assets overseas.
Depending on your circumstances, you might need to complete FATCA filing alongside your regular IRS filing. To set you up for success, this guide runs through key questions like: what is FATCA reporting and how do I get started?
We’ll also touch on how you can cut your costs when sending money overseas with Wise — handy when it comes time to pay your US taxes from abroad.
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|This article has been written in collaboration with Katelynn Minott — Managing CPA and CEO at Bright!Tax US Expat Tax Services.|
The Foreign Account Tax Compliance Act (FATCA)¹ was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. The legislation was created in an effort to combat tax evasion for US citizens holding assets outside of the States.
Typically, FATCA is known as a requirement for certain foreign financial institutions to report the tax residency and bank account details of any US citizen or dual citizen that stores value with them.
How it could impact you as an individual is the possible requirement to file Form 8938 with your annual tax return. US taxpayers holding high-value financial assets abroad must report those assets to the IRS as part of their annual filing.
This is then matched by a requirement for foreign financial institutions to report information about their US clients to the IRS, so data can be checked and reconciled.
We’ll look more pointedly at asset types a little later — but in brief, this could be money you hold in foreign bank accounts, international stocks, and shares, or an interest you have in a foreign business for example.
Failure to properly report overseas assets risks penalties. That’s why it’s important that anyone living or working internationally has a good understanding of FATCA reporting and filing requirements.
This guide is a great place to start learning more — but make sure to seek professional advice for your specific needs.
FBAR is the Report of Foreign Bank and Financial Accounts. US citizens are likely to need to complete FBAR reporting if the combined balance of all the foreign accounts you own or have a financial interest or signature authority is more than 10,000 USD at any point during the calendar year.
You will report this on FinCEN Form 114 electronically through FinCEN's BSA E-Filing System separately from your annual tax return. FATCA requirements, or Form 8938, kick in at a higher threshold of 50,000 USD in foreign financial assets if you reside in the US — though, if you’re living abroad, that threshold can go up to 200,000 USD.
The requirement to report on Form 8938 doesn’t replace the need to comply with FBAR reporting. Individuals may need to complete one or both of these processes as they serve different purposes.
FATCA (Form 8938) is filed with the IRS, while FBAR (FinCEN Form 114) goes directly to FinCEN, which is separate from the IRS².
If you’re unsure which to use, get professional advice to make sure you’re not falling foul of the law.
You’ll usually need to file FATCA if you have a specific interest in foreign assets which exceed the FATCA threshold, and you are³:
- A US citizen
- A resident alien of the US for any part of the tax year aka a Green Card holder
- A nonresident alien who elects to file US taxes as a resident alien
- A nonresident who is a bona fide resident of American Samoa or Puerto Rico
FATCA reporting requirements also apply to entities like partnerships, trusts, and corporations. We’ll detail the relevant thresholds and a bit more guidance about the sort of assets that are counted towards these thresholds a little later.
FATCA reports are submitted to the IRS, using Form 8938, which must be attached to your normal annual income tax return. The deadline for FATCA filing will be the same as the deadline for your regular IRS filing in any given year.
You must report any specified foreign financial assets if, at any time, the value hits or goes over the threshold relevant to your personal situation. The reported assets are usually:
Any financial account maintained by a foreign financial institution — this includes bank accounts, pensions, funds, and similar
Foreign stocks and securities
Interest in a foreign company
Financial instruments which are issued outside of the US
The thresholds at which you need to report for FATCA vary based on your personal situation, however. Here’s a run through some common scenarios for evaluating foreign financial assets for Form 8938 reporting:
|If you live in the US||If you don’t live in the US|
If you are exempt from filing an income tax return for the year, you won’t usually need to complete a FATCA filing either — no matter what your foreign assets look like⁴.
Failure to comply with FATCA requirements can result in a penalty of 10,000 USD, rising to 50,000 USD for continued failure after IRS notification. Any underpayments of tax due to undisclosed foreign financial assets will be subject to an additional 40% penalty. In most drastic circumstances, criminal penalties may also apply⁴.
As an individual taxpayer, you’ll need to file IRS Form 8938 and submit it at the same time as your annual tax filing.
The instructions for filing Form 8938⁵ include a full description of the types of assets that must be reported, who needs to complete a filing, and some examples to help you understand different scenarios.
Again, the key form you need to know about for FATCA is Form 8938 — Statement of Specified Foreign Financial Assets⁶.
You’ll file this alongside your annual income tax filing, which is likely to be completed using one of the following IRS forms:
- Form 1040
- Form 1040-NR
- Form 1040-SR
- Form 1041
- Form 1041-N
- Form 1065
- Form 1120
The complexity (or simplicity) of completing this step varies, unfortunately! Reporting different types of overseas assets has nuance to it.
If you simply have money in a bank account overseas, this is likely easy to assess and report. However, if you have a different type of asset — like a pension fund, part ownership of a business, or a foreign investment fund — the process can quickly get complicated.
In this case, there are full instructions from the IRS about how to value foreign financial assets, and you’ll also be able to seek professional advice from a tax adviser who is used to working with expats’ foreign assets, such as Bright!Tax.
If you’re an expat and need to pay your US taxes from abroad, you could save money with Wise.
Wise low-cost international payments use the real mid-market exchange rate with low, transparent fees. That can mean you save significantly compared to using your normal bank to send money overseas.
All Wise payments are arranged online or in the Wise app for convenience, and you’ll be able to instantly see the full costs of your payment before you confirm it.
45% of Wise payments arrive instantly, and the vast majority are deposited within 24 hours, so there’s no need to worry about your taxes turning up late, either.
So there you have it — the full guide to FATCA reporting, and hopefully, plenty to get you prepared if you live and work overseas, or hold foreign assets.
If you’re an expat paying your US taxes from abroad you could cut the costs of international payments and currency conversion by choosing Wise instead of relying on your regular bank for your international money transfer. It’s fast, safe — and cheap — to get your money to the US from anywhere in the world.
- IRS - summary of key FATCA provisions
- IRS - comparison of FATCA and FBAR
- IRS - do I need to file Form 8938
- IRS - FATCA information for individuals
- IRS - Form 8938
- IRS - about Form 8938
Sources checked on 07.12.2022
This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date.
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