FATCA Summarized

The Foreign Account Tax Compliance Act (FATCA)

Objective of FATCA is to prevent offshore tax evasion by persons and entities and it focuses on identifying the accounts held by US persons and entities. No doubt the purpose of FATCA is to serve as an oversight to prevent unlawful behavior and ensure better tax compliance.

Form 8938, Statement of Specified Financial Assets is filed by specified individuals and specified domestic entities along with the Annual Tax return who have interest in specified foreign financial assets and meet reporting thresholds. Though, often confused with FBAR FinCEN Form 114 which is filed with Department of treasury annually by US persons, Form 8938 filing doesn’t exempt from filing FinCEN Form 114.

FATCA also requires Banks and Financial Institutions to report to IRS directly about the accounts held by the US persons or entities in which US persons hold interests. Almost everyone has observed that banks and financial institutions in UAE now require these disclosures on various account opening and KYC forms.

Despite of an outcry and criticism in the past for FATCA being an unjust law, it is a reality now and there is no way to escape from it. Penalties for not reporting are serious!

Who must file form 8938? Specified individuals – U.S. Citizens, resident aliens and certain non-resident aliens – and Specific domestic entities – certain domestic corporations, partnerships and trusts. Unlike FBAR, United States (for FATCA purpose) does not include United States.

Reporting Thresholds for Specified Individuals

Maximum value of specified foreign financial assets is reported. Reporting Thresholds for Specified Individuals living in the US and outside the US are different;

Specified individuals who are living in the US:

  1. For Unmarried individual (or married filing separately): Total value of assets was more than $50,000 on the last day of the tax year, or more than $75,000 at any time during the year.
  2. For Married individual filing jointly: Total value of assets was more than $100,000 on the last day of the tax year, or more than $150,000 at any time during the year.

Specified individuals who are living outside the US:

  1. For Unmarried individual (or married filing separately): Total value of assets was more than $200,000 on the last day of the tax year, or more than $300,000 at any time during the year.
  2. For Married individual filing jointly: Total value of assets was more than $400,000 on the last day of the tax year, or more than $600,000 at any time during the year.

Reporting Threshold for Specified domestic entities:

Total value of assets was more than $50,000 on the last day of the tax year, or more than $50,000 at any time during the tax year.

What is an interest in Account or Asset: Interest in an account here means If any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the account or asset are or would be required to be reported, included, or otherwise reflected on your income tax return.

Reportable Foreign Financial Assets

Below are the various types of Financial Assets which are reported under FATCA:

  • Financial accounts at foreign financial institutions, this includes both deposits and custodial.
  • Foreign stock or securities held in a financial account at a foreign financial institution – Only account need to be reported, there is no need to report contents of the account
  • Foreign stock or securities not held in a financial account
  • Foreign partnership interests
  • Foreign Mutual Funds
  • Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust for which you are the grantor
  • Foreign-issued life insurance or annuity contract with a cash-value
  • Foreign hedge funds and foreign private equity funds

Below are the types of Financial Assets which are “not” reported under FATCA:

  • Financial account held at a foreign branch of a U.S. financial institution
  • Financial account held at a U.S. branch of a foreign financial institution
  • Foreign financial account for which a person has signature authority, unless person holds ownership interest in this account
  • Indirect interests in foreign financial assets through an entity
  • Domestic mutual fund investing in foreign stocks and securities
  • Foreign real estate held directly
  • Foreign real estate held through a foreign entity, however, the foreign entity itself is a specified foreign financial asset and its maximum value includes the value of the real estate
  • Foreign currency held directly
  • Precious Metals held directly
  • Personal property, held directly, such as art, antiques, jewelry, cars and other collectibles
  • ‘Social Security’- type program benefits provided by a foreign government

Due Date for Form 8938: Form 8938 is attached with Annual Return and due with the filing date of same. If the return filing is extended, filing of this form is extended accordingly.

Penalties

Up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of a failure to disclose, for a potential maximum penalty of $60,000; criminal penalties may also apply.

Disclaimer: This is not a tax advice. Contents of this publication are summarized, compiled and updated from IRS Publication on the subject which was last updated in Sep 2017. For updated information and specific advice to your case, please contact your tax advisor.

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