Foreign Account Tax Compliance Act (FATCA) is a crucial piece of legislation for U.S. taxpayers, especially those living abroad. It mandates the reporting of specified foreign financial assets by filing Form 8938 if these assets surpass certain thresholds. Introduced as a measure to curb offshore tax evasion, FATCA aims to ensure transparency in foreign-held assets. For individuals, filing Form 8938 is a central compliance obligation under FATCA. Therefore, determining whether your foreign assets meet the specified thresholds is essential for adhering to this regulation.
What is FATCA?
FATCA is a tax compliance act aimed at increasing transparency regarding financial accounts held outside the U.S. by U.S. persons, including citizens, green card holders, and certain resident aliens. While the HIRE Act sought to raise revenues and equalize the tax burden, FATCA specifically focuses on foreign-held financial assets and the prevention of offshore accounts being used for tax evasion.
The law requires both individual taxpayers and foreign financial institutions (FFIs) to report specific foreign financial accounts, including bank accounts, mutual funds, life insurance policies, and annuity contracts. Under FATCA, financial institutions worldwide are affected unless they qualify for exemptions. This includes credit unions, investment firms, and foreign entities engaged in holding financial assets.
Failure to comply with FATCA may trigger serious consequences, including a 30% withholding tax on U.S. source payments made to non-compliant FFIs or their clients.
Key Features of FATCA
- Individual Reporting: U.S. citizens and residents must report their foreign accounts and foreign financial assets on Form 8938. This is in addition to filing an FBAR if applicable.
- Institutional Reporting: FATCA requires that foreign financial institutions identify and report accounts held by U.S. taxpayers to the IRS. These reports must include account balances, income, and relevant information.
- Penalties: Non-compliance can lead to penalties for both individuals and institutions. For FFIs, failure to report may result in the 30% FATCA withholding tax. Individuals may face fines up to $50,000 and extended statutes of limitation for IRS audits.
- Due Diligence Procedures: FATCA imposes due diligence obligations on financial institutions. These include verifying the tax status of account holders, collecting taxpayer identification numbers (TINs), and requesting certifications of U.S. tax residency.
Who Needs to Comply with FATCA?
FATCA applies to:
- U.S. citizens, including those with dual citizenship
- Green card holders
- Resident aliens and non-resident citizens meeting substantial presence tests
- Certain foreign entities with U.S. owners
U.S. persons are subject to taxation on worldwide income under citizenship-based taxation, even if they do not reside in the United States. As such, U.S. tax obligations persist regardless of your residency status.
Foreign entities like financial institutions and non-financial foreign entities (NFFEs) must also comply with FATCA regulations. These entities are obligated to disclose U.S. ownership or face withholding on certain payments from U.S. sources.
What Are the FATCA Filing Requirements?
If you’re a U.S. taxpayer holding foreign financial assets with a total value above the applicable threshold, you must file Form 8938:
For U.S. Residents:
- Single or Married Filing Separately: Over $50,000 on the last day of the tax year, or $75,000 at any time
- Married Filing Jointly: Over $100,000 on the last day, or $150,000 at any time
For U.S. Expats (Living Abroad):
- Single or Married Filing Separately: Over $200,000 on the last day of the year, or $300,000 at any time
- Married Filing Jointly: Over $400,000 on the last day, or $600,000 at any time
These thresholds apply to the aggregate value of all reportable accounts and specified foreign financial assets.
What Foreign Financial Accounts Need to Be Reported?
FATCA reporting applies to a broad array of foreign investments, including:
- Foreign bank accounts
- Brokerage accounts
- Registered Retirement Savings Plans (RRSPs)
- Registered Retirement Income Funds (RRIFs)
- Registered Disability Savings Plans (RDSPs)
- Tax-Free Savings Accounts (TFSAs)
- Life insurance policies with cash value
A foreign financial institution, including Canadian financial institutions, must determine if these accounts are reportable.
To learn how to report these accounts appropriately under FATCA, visit our full guide to Form 8938 reporting.
What Qualifies as a Specified Foreign Financial Asset?
Specified foreign financial assets include:
- Financial accounts held at foreign institutions
- Interests in foreign partnerships, corporations, and trusts
- Foreign pensions, retirement funds, and hedge funds
- Beneficial interests in foreign estates
- Non-account financial instruments, including foreign-issued securities
These assets must be reported if their combined value exceeds the thresholds for the applicable tax year.
FATCA and Canada: The Intergovernmental Agreement (IGA)
The Canadian government signed an intergovernmental agreement (IGA) with the U.S. on February 5, 2014, under the Canada-U.S. Tax Convention. This agreement outlines how Canadian financial institutions comply with FATCA.
Key points:
- The IGA shifts reporting from the IRS to the Canada Revenue Agency (CRA), which conducts an automatic exchange of FATCA data.
- The CRA began collecting data on July 1, 2015.
- Canadian financial institutions began implementing due diligence procedures on July 1, 2014.
- Retail clients are not subject to the 30% withholding tax under the IGA.
- FATCA still applies to U.S. persons residing in Canada, despite Canadian tax law differences.
FATCA vs. FBAR: Key Differences and When You Need Both
Though FATCA and FBAR (Foreign Bank Account Report) both address foreign account tax compliance, they serve different purposes and have distinct reporting requirements:
- FATCA Reporting on Form 8938: This form reports specified foreign financial assets like foreign accounts, non-account assets, and certain foreign gifts. FATCA’s main purpose is to capture a broad picture of U.S. taxpayers’ foreign assets
- FBAR Reporting: FBAR, required for individuals with foreign bank account balances exceeding $10,000 at any point in the tax year, focuses specifically on foreign financial accounts held in foreign banks or financial institutions. U.S. taxpayers must report foreign financial accounts on the FBAR form and Form 8938 to report foreign financial assets to the IRS.
FBAR vs Form 8938: A Side-by-Side Comparison
When Do You Need to File Both?
A taxpayer may need to file both Form 8938 and the FBAR if they hold foreign bank accounts or foreign financial assets exceeding FATCA reporting thresholds and the FBAR limit. For example, foreign accounts should be reported on the FBAR, while other specified foreign assets held over the FATCA threshold are reported on Form 8938.
What Happens if You Do Not File Form 8938?
The IRS imposes steep penalties for non-compliance:
- $10,000 fine for initial failure to file
- Up to $50,000 for continued noncompliance
- Extended audit window if income from foreign entities is not reported
The FATCA enforcement mechanism is backed by a global network of tax authorities in partner countries, reinforcing compliance through automatic exchange of information.
For detailed guidance on penalties and how to avoid them, see our FAQ: Tax Penalties and Fines for U.S. Expats
Who is Exempt From FATCA Reporting?
Not all foreign-held assets fall under FATCA reporting. For instance, foreign real estate held directly (as opposed to through a foreign corporation or partnership) does not qualify as a specified foreign financial asset. Additionally, assets held for use in a trade or business—like inventory or business equipment in a foreign country—are not reportable under Form 8938. This distinction is important as it prevents unnecessary reporting of assets that are not primarily investment-based.
Missed FATCA Filings? Here’s How to Get Back on Track
If you’re a U.S. expat who missed filing Form 8938, the IRS Streamlined Filing Compliance Procedures allow you to:
- File 3 years of overdue tax returns
- Submit 6 years of FBARs
- Avoid penalties by certifying non-willful conduct
This is an important opportunity for U.S. persons living abroad to correct past mistakes and align with FATCA regulations without facing harsh consequences.
Ready to Get Compliant? Contact Us for Free Tax Advice
Navigating FATCA and foreign account tax compliance can be complicated. Whether you’re a green card holder, non-U.S. resident, or dual citizen, we’re here to help. Our tax advisors at 1040 Abroad offer free guidance to help you meet your U.S. tax obligations with confidence.
Contact us today to ensure your reportable accounts are disclosed properly and your tax liability is fully managed under current FATCA regulations.
