When Jake turned 35, he was notified that his Italian grandmother had passed away and left him her estate. While it was a significant windfall that would help him pay off his car and put a down payment on a house, it also came with tax implications. Jake was fortunate that he had some tax law education, or he might not have known that inheriting money from abroad meant FATCA reporting. That could have been a costly mistake.
Jake and people like him, who inherit money from abroad, aren’t the only ones with a FATCA filing requirement. Individuals with many types of foreign financial interests have to file under this important tax compliance act or risk significant fines and penalties from the U.S. Here’s what to know about FATCA and when it might apply to you so you can protect your financial future.
What is FATCA?
The Foreign Account Tax Compliance Act (FATCA), is part of the HIRE Act. It’s designed to combat tax evasion and ensure everyone pays their share of taxes on the holdings they have abroad. If you’re a U.S. taxpayer and you have a foreign account or asset, FATCA likely applies to you.
There are very few exceptions to the requirement of reporting foreign financial income on Form 8938. These include:
- Foreign income already reported on other areas of your tax return.
- Foreign financial assets held for use in business or a trade.
Some dealers who hold securities in inventory for trade in the course of doing business may also be exempt from these filing requirements. FATCA can be complicated and it’s best to consult a tax professional to ensure accuracy and compliance.
Reporting Requirements
Guidelines for FATCA reporting are clear-cut and strict. If you’re a U.S. taxpayer and you hold foreign assets with a total value of more than the current reporting threshold (which is at least $50,000) you must report those assets. To do that, you’ll use Form 8938, Statement of Specified Foreign Financial Assets, and attach that to your tax return.
If you’re married and filing a joint tax return, or you’re a U.S. taxpayer living in a foreign country, your FATCA reporting threshold will be higher. For example:
- If you are single or file separately from your spouse and live abroad, you must file Form 8938 if your foreign assets are higher than $200,000.
- For married couples, the thresholds double (i.e. you must file if you have more than $100,000 in foreign assets and live in the U.S. or more than $400,000 and live abroad).
Again, there can be some exceptions and additional requirements for specific tax situations. Working with a tax lawyer is the right way to ensure you comply with the FATCA filing requirement and reduce the chances of making a mistake.
Ensuring Compliance
Complying with FATCA involves meeting deadlines and disclosing foreign income and assets accurately. The first step is to ensure you gather all documents that pertain to your foreign financial activities. These should be sent to you by the institutions or organizations that hold the assets for you, but it’s your legal responsibility to ensure you collect these documents and file your taxes correctly.
Once you have all your documents and information, fill out and file Form 8938 with your tax return. You’ll want to ensure you file or request an extension by the U.S. tax filing deadline, which is April 15th.
Remember:
- You may have a higher audit risk when you hold significant foreign assets, so keep all your tax paperwork and forms safe.
- A tax lawyer can help you address questions, comply with audits, and settle past or current FATCA issues.
- Penalties for non-compliance can be up to $10,000 per violation, $50,000 for not filing when notified by the IRS, and 40% of the underpayment.
- There may also be criminal penalties for non-compliance, depending on the individual case.
- When you meet the requirement for filing Form 8938, there are other corresponding foreign disclosures that are likely to be required. Be sure you understand what these are and include them when necessary.
Compliance with the FATCA filing requirement must be an essential part of any U.S. taxpayer’s financial focus when they have foreign assets or income.
Avoid the Risk of Noncompliance
With the risk of significant penalties, the FATCA filing requirement should be taken seriously. Fortunately, working with a tax lawyer can make IRS issues less stressful. Get in touch with us today at Kundra & Associates and let us help you solve your FATCA reporting concerns.
With 30 years of positive results and a focus on employment tax law, international tax law, personal tax, and tax defense and resolution, we’re here for you. If you’re receiving notices from the IRS about a lack of FATCA reporting or there are discrepancies you need to address, we can help!
