Taxation of American Expatriates Under FATCA

In 2010, the Foreign Account Tax Compliance Act (FATCA) was passed by Congress and signed into law. The purpose of FATCA was to crack down on the use of offshore accounts to evade taxes. While FATCA has likely accomplished this goal, it has also made life much more difficult for American expatriates.

American citizens living abroad should understand the effect of FATCA on their U.S. tax requirements. If you have questions or concerns regarding your situation, speaking with Boston tax attorney Kevin Thorn may be the best option to meet your tax needs.

Financial Asset Reporting Under FATCA for American Expats

FATCA imposed a new reporting requirement for foreign financial assets. For American expats holding foreign financial assets above certain thresholds, they must report those assets annually on Form 8938. The minimum thresholds are $200,000 in combined value for individual taxpayers and $400,000 for married taxpayers filing jointly.

This reporting requirement only applies to financial assets, including the following:

• Accounts at banks or other financial institutions
• Stocks and bonds
• Pension
• Business interests

The Form 8938 requirement does not apply to tangible assets owned in the expat’s name. Such non-qualifying assets include real estate, vehicles, art and jewelry.

Penalties for Non-Compliance with FATCA Financial Asset Reporting

The penalties for failing to report foreign financial assets on Form 8938 are extensive and include the following:

• Direct IRS Non-Compliance Penalties: The IRS may impose a penalty of $10,000 for failure to report foreign assets on Form 8938. This penalty increases to $50,000 for continued failure to comply after notification by the IRS.
• Tax Underpayment Penalties: If the failure to report resulted in underpayment of taxes, the expat may be subject to a substantial underpayment penalty of 40 percent of the underpaid amount.

The FBAR Requirement Still Applies to Foreign Accounts

American expats should note the Form 8938 requirement is imposed in addition to the FBAR requirement. Whether or not Form 8938 is required, American citizens with combined foreign account balances of $10,000 or more must still file the Foreign Bank Account Report (FBAR) with the Financial Crimes Enforcement Network (FinCEN).

Foreign Bank Reporting Under FATCA

The second major effect of FATCA on America expats are the foreign bank reporting requirements. Under FATCA, all foreign financial institutions must report information to the IRS on accounts held by American citizens. The information to be reported includes account balances and contact information for the account holder.

If the foreign financial institution fails to comply with this requirement, the U.S. imposes a 30 percent tax on any transactions in U.S. markets. This steep tax guarantees that the vast majority of institutions will comply and report this information.

This reporting requirement for foreign banks makes it far easier for the IRS to discover expat-owned foreign assets. The IRS can cross-reference bank-reported information with the expat’s other filings, such as Form 8938 or FBAR, to determine any discrepancies. Or if no such forms have been filed, the IRS can determine the taxpayer should have filed them.

Consult a Boston Tax Attorney at Thorn Law Group Today

American expats with ties to the Boston area should consider meeting with a Boston tax lawyer to meet their tax needs. Contact Kevin E. Thorn, Managing Partner, at (617) 692-2989 to schedule a consultation, or email him at ket@thornlawgroup.com.