The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 to combat tax evasion by U.S. taxpayers through foreign accounts. FATCA introduced extensive reporting obligations for both U.S. taxpayers and foreign financial institutions (FFIs). However, not all individuals or entities are subject to these rules.
In this article, we will explore who is exempt from FATCA reporting, and clarify key concepts related to specified foreign financial assets, foreign financial accounts, and the reporting thresholds that trigger FATCA filing requirements.
Understanding FATCA: A Brief Overview
FATCA, formally known as the Foreign Account Tax Compliance Act, requires U.S. taxpayers to report foreign financial assets if they exceed specific thresholds. It also requires foreign financial institutions (FFIs) 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.
FATCA’s primary tool is Form 8938, which is filed with the income tax return.
What Are Specified Foreign Financial Assets?
Specified foreign financial assets include:
- Foreign bank accounts
- Foreign mutual funds
- Certain foreign financial accounts
- Stock or securities issued by foreign corporations
- Interests in foreign partnerships
- Interests in foreign estates
- Ownership in foreign financial institutions
- Interests in foreign retirement accounts
- Foreign real estate held through a foreign entity
- Foreign non account assets such as bonds or notes issued by a foreign government
To determine whether FATCA applies, U.S. taxpayers must calculate the aggregate value of all foreign financial assets and compare it to the applicable reporting threshold.
Related: How to Report Foreign Bank Accounts on Your Tax Return
FATCA Reporting Thresholds
FATCA thresholds vary depending on filing status and residency:
- Single U.S. taxpayers living in the U.S. must file Form 8938 if foreign financial assets exceed $50,000 on the last day of the tax year or $75,000 at any time during the year.
- Married taxpayers filing jointly must report if foreign assets exceed $100,000 on the last day or $150,000 at any time during the tax year.
- Taxpayers living abroad enjoy higher thresholds: $200,000 on the last day or $300,000 during the year for single filers.
The form 8938 thresholds differ from those used to report foreign financial accounts on FBAR (FinCEN Form 114), but both may apply.
Who Is Exempt from FATCA Reporting?
Not all individuals or entities are subject to FATCA. The following are exempt from FATCA reporting:
1. Individuals Below the Reporting Threshold
Taxpayers whose foreign financial assets fall below the relevant reporting threshold are exempt from FATCA reporting for that tax year. However, if the aggregate value crosses the limit at any point, reporting becomes mandatory.
2. Specified Domestic Entities Not Meeting Criteria
Only a specified domestic entity—typically a closely held corporation, partnership, or trust with passive income and assets—is subject to FATCA. If an entity does not meet the definition of a specified domestic entity, it is exempt from FATCA.
3. Taxpayers With Only Foreign Real Estate
Direct ownership of foreign real estate is not a foreign financial asset. Therefore, owning a house or land abroad does not trigger FATCA unless held through a foreign corporation, foreign partnership, or foreign estate.
4. Certain Foreign Retirement Accounts
Some foreign retirement accounts, such as government-mandated pension plans in certain countries, may be considered non-reportable. However, this depends on the account type and whether it’s classified as a foreign financial account.
5. Certain Financial Institutions and Foreign Entities
Certain foreign financial institutions, such as government-owned banks, certain insurance companies, and foreign central banks, may be exempt from FATCA reporting. Similarly, foreign entities such as foreign governments, international organizations, and foreign corporations with active business operations may not need to file FATCA forms.
What Are Foreign Financial Institutions (FFIs)?
Foreign financial institutions (FFIs) include:
- Foreign banks
- Investment firms
- Insurance companies
- Certain foreign subsidiaries of U.S. firms
- Foreign branches of U.S. institutions
These entities are required to report U.S. account holders to the IRS or face withholding penalties. However, certain financial institutions may be deemed compliant or exempt from FATCA reporting under specific intergovernmental agreements (IGAs).
Specified Domestic Entity: A Closer Look
A specified domestic entity is typically a:
- Corporation or partnership with at least 50% of gross income being passive, and
- 50% or more of its assets produce or are held for producing passive income, and
- It is owned directly or indirectly by U.S. individuals.
These entities must file Form 8938 if they own specified foreign financial assets above the reporting threshold.
Foreign Entities and NFFEs
Non financial foreign entities (NFFEs) are foreign entities that are not financial institutions. These include:
- Foreign corporations
- Foreign partnerships
- Foreign estates
- Certain foreign trusts
NFFEs may be required to disclose U.S. account holders with substantial ownership interest. However, non financial foreign entities engaged in active trades or businesses may be excluded from FATCA disclosure if they meet specific conditions.
What Must Be Reported on Form 8938?
U.S. taxpayers must report:
- Name and address of the foreign bank
- Account number or other identifier
- Type of financial account maintained
- Foreign financial assets held directly or indirectly
- Value at year-end and highest value during the tax year
Failure to file Form 8938 can result in a $10,000 penalty, increasing to $50,000 for continued failure. Additionally, IRS can extend the statute of limitations for auditing returns with non disclosed assets.
Examples of Foreign Financial Assets That Must Be Reported
- Checking or savings accounts in a foreign bank
- Shares in a foreign mutual fund
- Bonds issued by a foreign government
- Interest in a foreign partnership
- Foreign account holdings through trusts
- Foreign financial instruments such as derivatives or notes
The FATCA rules are broad, and taxpayers must evaluate all foreign assets when determining FATCA obligations.
When Foreign Accounts Are Not Reportable
Foreign accounts are not reportable under FATCA if:
- Held at a foreign government institution
- Maintained by a foreign branch of a U.S. bank
- Within foreign subsidiaries that are publicly traded
- Total foreign financial assets remain below thresholds
However, these exceptions do not necessarily apply for FBAR, so both FATCA and FBAR compliance must be considered separately.
FATCA and Foreign Gifts
FATCA also requires reporting of certain foreign gifts, particularly those exceeding $100,000 from a foreign person or $16,649 from a foreign corporation or foreign partnership. These are reported separately, not on Form 8938, but on Form 3520.
Consequences of Noncompliance
Failing to meet FATCA filing requirements can lead to:
- $10,000 failure-to-file penalty
- Additional $10,000 for each 30-day delay up to $50,000
- Potential criminal charges for tax evasion
- Extension of statute of limitations to six years for non disclosed assets
Understanding If You’re Exempt from FATCA
U.S. taxpayers with any type of foreign financial assets should evaluate their exposure each tax year, especially if filing a joint income tax return or holding complex foreign entities.
In summary, individuals below thresholds, those with only direct foreign real estate, and certain foreign financial institutions FFIs and non financial foreign entities are often exempt from FATCA. However, FATCA is expansive, and caution is required to ensure compliance with the account tax compliance act.
If you’re unsure whether your foreign financial assets are specified foreign financial assets, or whether your foreign account tax compliance obligations apply, consult a qualified tax advisor.
