What is FATCA?
The Foreign Account Tax Compliance Act (FATCA) has two provisions that are important to most taxpayers. One provision requires foreign banks and financial institutions to report information relating to United States account holders to the government including identifying information, account balances, and income earned in those accounts. This reporting is relatively new, as it took effect on July 1, 2014.
The second relevant provision requires taxpayers subject to this provision to report the maximum value of foreign financial accounts, and other financial investments such as ownership of a foreign entity, by filing Form 8938 along with their tax return.
Who Has to File Form 8938?
The requirement to file Form 8938 applies to taxpayers living in the United States who have more than $50,000 in reportable foreign assets on the last day of the year, or $75,000 at any point during the year. If the taxpayer files a joint return, the requirement only applies if the taxpayers have more than $100,000 in reportable foreign assets on the last day of the year, or $150,000 at any point during the year.
For taxpayers living outside of the United States, the requirement only applies to taxpayers holding more than $200,000 in reportable foreign assets at the end of the year, or $300,000 at any point during the year. For taxpayers filing a joint return, the requirement only applies if the taxpayers hold more than $400,000 in reportable foreign assets at the end of the year, or $600,000 at any point during the year.
What Happens if Form 8938 is Not Filed?
If a taxpayer is subject to the FATCA reporting requirement, Form 8938 must be included with the tax return. If this Form is not included, the taxpayer may be subject to a civil penalty of $10,000 for failing to file, plus an additional $10,000 every 30 days after being notified of the filing requirement, up to $50,000, for a total potential penalty of $60,000 per year. Although there is a reasonable cause exception, simply “not knowing” is generally not enough to avoid the penalty. Failure to file this Form may also result in criminal penalties. Additionally, the statute of limitations for a tax return that fails to include Form 8938 will not start to run until the Form is filed, giving the IRS an unlimited amount of time to audit.
How is FATCA Different from FBAR?
The reporting requirement under FATCA has many similarities, and some important differences from the preexisting FBAR requirement, which requires United States residents, citizens, and those who do business in the United States to report the maximum value of their foreign accounts to the Department of the Treasury if those accounts exceed $10,000 at any time in any given year. Under the FBAR requirements, the report is not part of the tax return, and instead is reported on FinCEN 114 (previously TDF 90-22.1) to the Financial Crimes Enforcement Network, another division of the Department of the Treasury. The most common civil penalty for failing to file this report is $10,000 per account per year.
To illustrate how these reporting requirements work together, suppose Pierre was born in France, but moved to the United States in 2013 and became a citizen as a young adult. Pierre has an investment account in France that contains $75,000. Pierre has heard a little bit about FATCA and FBAR but never really paid attention to it, because he believed it only applied to criminals. For this reason, Pierre files his tax return, including all of his income from the United States, but forgot about the income earned in his investment account and does not report it on Form 8938 or FinCEN 114.
A few years later, the IRS obtains information from Pierre’s bank in France and finds out that Pierre did not report the income earned, or the existence of the account. At a minimum, the IRS can assess penalties on Pierre for failing to report the account on FinCEN 114 for five years, for a total of $50,000, and penalties for failing to file Form 8938 with his tax return for an additional $50,000 (or more if Pierre was provided notice of his requirement to file). Additionally, all of Pierre’s tax returns since he moved to the United States can be audited because the statute of limitations has not started running on any of them. He will be subject to taxes, penalties (at a higher rate than normal), and interest, going all the way back to his tax return in 2013.
In this situation, the total cost to Pierre will be in excess of $100,000, all of which could have been avoided had he filed two forms each year.