Form 8938 – FATCA for expats explained
FATCA stands for Foreign Account Tax Compliance Act and went into effect on July 1, 2014. The law was introduced to combat tax evasion abroad. This article gives you a basic overview of FATCA for Americans living abroad. It explains what the law entails, who must file, what must be reported, when to file, and the consequences if you do not file.
What is FATCA?
To prevent US citizens and residents from potentially evading taxes, FATCA was put in place. Form 8938 requires individual taxpayers to report financial assets they own overseas. Please note that FATCA is only a reporting requirement and has no additional tax implications. If you must comply with FATCA, you must file Form 8938, which should be part of your tax return.
What needs to be reported under FATCA?
The foreign financial accounts and assets that you need to report to the IRS include:
- Financial accounts in a foreign financial institution, such as savings, deposit, checking, and brokerage accounts,
- Foreign financial assets held for investment that are not managed by a financial institution (U.S or foreign), such as stock or securities issued by someone who is not considered to be a U.S. person,
- Foreign bonds, debentures, notes issued by a foreign person,
- Interests in a foreign entity, partnership, estate, and
- Financial instruments or contracts from an issuer or counterparty that is not a U.S. person.
The IRS has a useful overview published where you can easily see what needs to be reported and what does not need to be reported.
Who needs to file Form 8938?
American taxpayers with substantial foreign financial accounts and assets need to file form 8938 as part of their tax return. Thresholds for Americans living abroad is higher than when you live in the US.
If you are a taxpayer living abroad and filing a tax return that is not a joint return, and the aggregate value of your specified foreign financial assets is higher than $200,000 at the end of the tax year, you will need to file Form 8938 under the FATCA reporting requirement. Additionally, if you have more foreign assets with a value greater than $300,000 at any time in the tax year, you will also be required to file Form 8938.
When filing a joint return, the threshold is higher. For joint tax filers, if you have a specified foreign asset of more than $400,000 as of the last day of the applicable tax year, or more than $600,000 at any given time in the year, you will be required to file your tax return with Form 8938 in compliance with FATCA.
You can determine the value of your foreign financial assets by either calculating the fair market value, or using the year-end value, or the value of the financial statement of your aggregate financial assets.
When to file form 8938 under FATCA as an expat?
Since Form 8938 is filed as part of your expat tax return, the filing deadline for FATCA follows the filing deadlines of your US expat tax return. The deadline for expats is June 15, 2022 (2021 return). You can file form 8938 till October 15, if you have requested an extended filing deadline for your federal return.
What are the penalties for not filing Form 8938 under FATCA?
If you fail to meet the filing requirements for the Foreign Account Tax Compliance Act, you can face about $10,000 penalty fees, up to a maximum of about $60,000. The penalty fee can easily add up to a significant amount as you may pay an additional $10,000 for every 30 days of not meeting the filing requirements. In severe cases, there may be applicable criminal penalties for failure to disclose your foreign assets and accounts after being notified by the IRS.
If you are wondering how the FATCA requirements get enforced, then it is important to note that many countries have signed intergovernmental agreements that require financial institutions to also report any foreign accounts or financial assets owned by U.S citizens to local tax or U.S tax agencies. It seems that the US government can easily redflag you if you don’t file form 8938 while the info is also received from the financial instituions themselves.
If I file FATCA, do I still need to file FBAR?
FBAR should not confused with FATCA since they can be considered two separate reporting requirements.
Under the FBAR filing requirement, you are required to report certain foreign financial accounts, such as bank accounts, brokerage accounts, and mutual funds, to the Treasury Department through the Report of Foreign Bank and Financial Accounts (FBAR) on FinCEN Form 114 in case you have foreign financial accounts provided that the total value of the accounts exceed $10,000 at any time of the calendar year.
FBAR is a total separate reporting obligation which does not replace FATCA. Under the FBAR filing requirement, you (also) need to report certain foreign financial accounts, such as bank accounts, brokerage accounts, and mutual funds. So, it could very well be that you need to report your foreign accounts for FBAR and FATCA as well.
How to file form 8938 as an expat?
As said, Form 8938 needs to be filed as part of your federal tax return. Expatfile made this now really easy for you. Our software first checks whether you have a filing requirement of Form 8938 by answering our wizard. If it turns out you have a filing requirement under FATCA, we collect the required info in our questionnaire and generate form 8938 as part of your return. You can easily e-file your return yourself with the IRS as we are an IRS certified e-file provider.