Foreign Account Tax Compliance Act - FATCA
Summary: The Foreign Account Tax Compliance Act, generally referred to as FATCA, requires that foreign financial Institutions and certain other non-financial foreign entities report on the foreign assets held by their U.S. account holders.
Foreign Account Tax Compliance Act (FATCA) is a crucial piece of legislation for U.S. citizens and green card holders living abroad. Enacted in 2010, FATCA was designed to combat tax evasion by U.S. taxpayers using foreign bank accounts. It 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 interest. This means that even if a U.S. citizen is residing in another country and has local bank accounts, those financial institutions may be obligated to disclose the details of such accounts to the IRS.
For U.S. expatriates, FATCA adds another layer of reporting. While U.S. citizens have always had an obligation to report and pay taxes on their worldwide income, FATCA places an emphasis on foreign financial assets. Expatriates must file a Form 8938 with their tax returns if their foreign financial assets exceed certain thresholds. It’s worth noting that this is separate from the FBAR (Foreign Bank and Financial Accounts Report) that some expatriates might already be familiar with, which also mandates reporting of foreign accounts.
Non-compliance with FATCA can result in significant penalties for the taxpayer. Moreover, FFIs that don't adhere to FATCA regulations can be subjected to withholding on certain U.S. source income. As a consequence, many foreign banks are now wary of serving U.S. citizens due to the rigorous reporting requirements and potential penalties. For U.S. expatriates, this means that FATCA not only impacts their tax reporting responsibilities but can also influence their banking relationships abroad. It's crucial for U.S. expats to be aware of their FATCA obligations and ensure they are in compliance to avoid complications and potential financial consequences.
It is critical that U.S. expats be well-informed about their obligations under FATCA and the relevant deadlines to avoid potential penalties for non-compliance. Always consult with a qualified tax professional to ensure accurate reporting and to stay up-to-date with any changes in U.S. tax regulations that may not be reflected here.
Sources:
IRS: Foreign Account Tax Compliance Act (FATCA)
IRS: FATCA FAQs
U.S. Department of the Treasury: Foreign Account Tax Compliance Act
About the Author
Joshua Wood, LPC joined Expat Exchange in 2000 and serves as one of its Co-Presidents. He is also one of the Founders of Digital Nomad Exchange. Prior to Expat Exchange, Joshua worked for NBC Cable (MSNBC and CNBC
Primetime). Joshua has a BA from Syracuse and a Master's in Clinical and Counseling Psychology from Fairleigh Dickinson University. Mr. Wood is also a licensed counselor and psychotherapist.
Some of Joshua's articles include Pros and Cons of Living in Portugal, 10 Best Places to Live in Ireland and Pros and Cons of Living in Uruguay. Connect with Joshua on LinkedIn.
First Published: Jul 21, 2023