FATCA is an acronym for the Foreign Account Tax Compliance Act. FATCA was signed into law in 2010 as part of a response to the global financial crisis, to crack down on tax evasion by making it harder for Americans to hide money offshore. Unfortunately though, as well as making life harder for tax evaders, it also unintentionally affected many of the 9 million normal American who happen to live abroad.
FATCA contained two provisions that affect expats.
The first was a new reporting requirement for expats who have assets abroad. Specifically, expats with foreign assets with a minimum total combined value of $200,000 per person (so $400,000 for couples filing jointly) must report them each year by filing form 8938 along with their federal tax return.
Qualifying assets include all investment and financial assets, including business interests, but not tangible assets such as property owned in the expat’s name, cars, jewelry or art for example.
While this FATCA reporting provision won’t affect all expats, those who do have qualifying assets should ensure that they don’t neglect to report them, as penalties for not reporting them start at $10,000 a year.
The second provision contained in FATCA does affect the majority of American expats though.
Americans living abroad have been required to continue filing US taxes, reporting their worldwide income, since the Civil War, however the IRS never had any way of enforcing this requirement, allowing unscrupulous individuals to hide their income and assets abroad with impunity
FATCA however requires foreign banks and investment firms to report their American account holders to the IRS, including their contact and account balance information.
To ‘encourage’ this, FATCA imposes a 30% tax on any transactions non-compliant institutions carry out in US markets. As more or less all foreign financial firms need to trade in US markets, currently around 300,000 foreign banks and investment firms are complying.
This means that the IRS knows about most expats’ financial situations, giving it global enforcement reach for the first time.
In turn this has created problems for millions of ordinary US expats.
In particular, many foreign financial firms, including banks, have taken a decision that it is easier to decline services to Americans than to fulfil the costly administrative burden of FATCA compliance. As such, many Americans have had their accounts closed, or been refused credit or banking services. As a minimum, foreign banks and investment firms must seek to ensure that Americans are fully compliant with their US tax filing before accepting them as clients.
This has caused a huge amount of anxiety for many ordinary American expats, who may not have been aware of the obligation for them to file US taxes from abroad.
Expats are not only required to file a US tax return reporting their worldwide income from abroad, they are also required to file an FBAR (Foreign Bank Account Report) if they have a total of over $10,000 in foreign banks or investment accounts, including trust and business accounts, that they can control or benefit from even if not in their name, at any time during the tax year.
Penalties for not filing FBARs are steep, and so many Americans when asked by a foreign bank (or other financial firm) about US tax compliance have found themselves stuck between a rock and a hard place – to access banking or other financial services abroad they may first have to pay enormous non-compliance fines possibly going back numerous years.
The IRS though realized the dilemma that many normal American expats were facing, and in 2014 they re-launched the Streamlined Procedure amnesty program as a way for these expats – who were manifestly not the tax avoiders that FATCA was designed to dissuade – to catch up on their tax filing without facing any penalties, while also letting them claim the exemptions available for expats such as the Foreign Earned Income Exclusion and the Foreign Tax Credit that allow them to reduce their US tax liability (often to zero).
To become compliant using the Streamlined Procedure, expats must file their last 3 US tax returns, their last 6 FBARs, and self-certify that their previous non-compliance wasn’t willful avoidance.
Bright!Tax is the global leader providing US expat tax services for the 9 million Americans living abroad. Expat tax is all we do, and we are very good at it. If you have any questions regarding your tax situation, don’t hesitate to get in touch for some advice.