New Rules for Foreign Accounts Held By U.S. Citizens

By Garrett Sutton, Esq.

The new Foreign Account Tax Compliance Act (FATCA) becomes effective July 1, 2014. The IRS reporting is straight forward. The penalties for not reporting are onerous.

The Internal Revenue Service (IRS) requirements for FATCA are set forth in the following three (3) IRS documents:  (1) Summary of FATCA Reporting for U.S. Taxpayers; (2) Form 8938 – Statement of Specified Foreign Financial Assets; and (3) Instructions for Form 8938 (Rev. December 2013) – Statement of Specified Foreign Financial Assets.

FATCA is designed to combat tax evasion by United States (U.S.) persons holding accounts and other financial assets offshore.  Under FATCA, certain U.S. taxpayers holding financial assets outside the U.S. must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets.  There are serious penalties for not reporting these financial assets. These penalties include, but are no means limited to:  (1) a failure-to-file penalty in the amount of $10,000; (2) a continuing failure-to-file penalty in the amount of $10,000 per month (up to a maximum additional penalty of $50,000); (3) an accuracy-related penalty in the amount of 40 percent of any underpayment of tax; (4) a fraud penalty in the amount of 75 percent of any underpayment of tax due to fraud; and (5) a criminal penalty for failure to report an asset or for any underpayment of tax.

More specifically, FATCA requires certain U.S. taxpayers who hold foreign financial assets with an aggregate value of more than the reporting threshold (at least $50,000) to report information about those assets on Form 8938, which must be attached to the taxpayer’s annual income tax return.  The reporting threshold is higher for certain individuals, including married taxpayers filing a joint annual income tax return and certain taxpayers living in a foreign country.  As of January 2013, only individuals are required to report their foreign financial assets.

At a later time, a limited set of U.S. domestic entities (such as domestic corporations, partnerships, and trusts) also may have to report their foreign financial assets, but not for tax years starting before 2013.

In addition, there are some exceptions to the requirement to file Form 8938.  For example, U.S. taxpayers who do not have to file a U.S. income tax return for the year, do not have to file Form 8938, regardless of the value of their specified foreign financial assets.

A.        U.S. Taxpayers Living in the United States.

Generally speaking, the reporting thresholds for U.S. taxpayers living in the United States are, as follows:

1.  Married filing Jointly.  You must file a Form 8938 if you must file an income tax return and the total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.

2.  Unmarried.  You must file a Form 8938 if you must file an income tax return and the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

3.  Married filing Separately.  You must file a Form 8938 if you must file an income tax return and the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

B.        U.S. Taxpayers Living Abroad.

Similarly, the reporting thresholds for U.S. taxpayers living abroad (note:  these thresholds apply even if only one spouse resides abroad) are, as follows:

1.         Married filing Jointly.  You must file a Form 8938 if you must file an income tax return and the total value of your specified foreign financial assets is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year.

2.  Unmarried.  You must file a Form 8938 if you must file an income tax return and the total value of your specified foreign financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year.

3.  Married filing Separately.  You must file a Form 8938 if you must file an income tax return and the total value of your specified foreign financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year.

C.        Specified Foreign Financial Assets.

Specified foreign financial assets include foreign financial accounts and foreign non-account assets held for investment (as opposed to held for use in a trade or business), such as foreign stock and securities, foreign financial instruments, contracts with non-U.S. persons, and interests in foreign entities.  There are exceptions to the reporting requirement.

D.        Asset Valuation.

Generally speaking, a reasonable estimate of the highest fair market value of the asset during the tax year is reported, but special rules apply to ease valuation burdens.

In conclusion, individual taxpayers can best protect themselves from the new Foreign Account Tax Compliance Act (FATCA), effective July 1, 2014, by filling out a timely Form 8938.

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