As global connectivity increases, opportunities for individuals and small businesses to engage in the international economy are expanding rapidly. I regularly talk with clients who have invested in real property outside the United States or who conduct business with foreign partners or clients. While some concerns about international business, such as currency exchange rates, are apparent, other crucial issues remain less obvious. This article will illuminate key reporting rules under FATCA for U.S. taxpayers with international investments.
FATCA, or the “Foreign Account Tax Compliance Act,” became law in the United States in 2010. Its goal is to enhance the visibility of U.S. taxpayers' global holdings. Under FATCA, foreign financial institutions and individuals face increased reporting requirements to the IRS and the Department of the Treasury (via FinCEN). This means that if an individual fails to report foreign holdings or income, the IRS might still obtain this information from financial institutions, and the penalties for non-compliance are severe.
FATCA rules apply to a broad group, including U.S. residents with foreign assets (whether citizens or resident aliens) and U.S. expatriates with sufficient connections to the U.S. It can also affect non-U.S. business partners or shareholders who share accounts with "U.S. persons" under tax regulations. If you have foreign assets, investments, or bank accounts, you have FATCA reporting obligations to the U.S. Government.
Affected individuals must self-report their foreign assets annually. Foreign financial institutions, such as banks, brokers, and some insurance companies, are required to report asset and identity information for any suspected U.S. person. This could be triggered by your birthplace, prior U.S. residency, a U.S. address or phone number, and routine payments to a U.S.-based account. This dual reporting enables cross-checking to facilitate enforcement.
If you have foreign bank accounts with an aggregate value exceeding $10,000, you must complete the Report of Foreign Bank and Financial Accounts (FBAR) on FinCEN form 114. Additionally, you may need to file form 8938 with the IRS if your foreign assets exceed certain thresholds: $50,000 for single individuals living in the U.S., $200,000 for those living abroad, and double these amounts for married couples filing jointly. Exemptions may apply if the foreign assets are reported on other forms.
These forms must be filed annually if you meet the criteria. The FBAR filing deadline is April 15th for the previous year and can be filed electronically through FinCEN’s e-filing system. Form 8938 is due with your federal tax return. These additional FATCA forms are in addition to the standard income tax reporting requirements for both the U.S. and the local jurisdiction where the assets are held.
Timely filing of forms 8938 and FBAR is crucial because the penalties for non-compliance are steep. Failure to file form 8938 can result in a $10,000 penalty for the initial failure, up to an additional $50,000 for continued failure, and a 40% penalty on any tax understatement due to non-disclosed foreign assets. Moreover, the IRS may extend the statute of limitations for auditing and assessing penalties on your entire tax return for certain reporting failures. Not filing an FBAR can lead to penalties of the greater of $100,000 or 50% of the account balance per violation, with potential criminal consequences, including imprisonment.
If you plan to purchase foreign property or expand your business internationally, ensure you are prepared for these reporting requirements and have knowledgeable tax and legal advisors. If you suspect non-compliance, consult your advisors promptly, as there are ways to rectify the situation.
