What Is FATCA and How Does It Affect U.S. Taxpayers?

U.S. taxpayers with financial assets outside the United States may have additional reporting responsibilities beyond simply including foreign income on their federal tax return. One of the most important international reporting frameworks is FATCA — the Foreign Account Tax Compliance Act.

For certain individuals, FATCA can require foreign financial assets to be disclosed to the IRS using Form 8938, Statement of Specified Foreign Financial Assets.

What Is FATCA?

FATCA is a U.S. tax compliance law designed to improve reporting of financial accounts and assets held outside the United States.

It affects both U.S. taxpayers and certain foreign financial institutions.

For individual taxpayers, one of the most important requirements is determining whether specified foreign financial assets must be reported on Form 8938 with the federal income tax return.

Who May Need to File Form 8938?

Certain U.S. taxpayers may need to file Form 8938 when the value of their specified foreign financial assets exceeds the applicable reporting threshold.

Potentially reportable assets can include:

• Foreign bank accounts

• Foreign brokerage accounts

• Certain foreign stocks and securities

• Interests in certain foreign businesses

• Certain foreign financial instruments

• Interests in certain foreign trusts or estates

• Other specified foreign financial assets

The exact requirements depend on the taxpayer's circumstances and the assets involved.

What Are the FATCA Reporting Thresholds?

Unlike the FBAR's commonly referenced aggregate threshold, Form 8938 thresholds vary.

The applicable threshold can depend on factors including:

• Filing status

• Whether you're married

• Whether you file jointly

• Whether you live inside or outside the United States

• Value of your specified foreign financial assets

Because of these differences, taxpayers should not assume that the FBAR threshold determines whether Form 8938 is required.

Is FATCA the Same as FBAR?

No. Although both involve foreign financial reporting, FATCA and FBAR are separate requirements.

Form 8938 is generally filed with your federal income tax return, while the FBAR is filed separately using FinCEN Form 114.

The forms also differ in their reporting thresholds, definitions, and types of assets covered.

Some taxpayers may be required to file both.

Does Reporting Foreign Income Satisfy FATCA?

Not necessarily.

Reporting interest, dividends, capital gains, or other foreign income on your tax return does not automatically satisfy separate foreign asset reporting requirements.

Income reporting and asset disclosure are related but distinct obligations.

A taxpayer could correctly report income from an overseas account while still overlooking a required Form 8938.

What About Foreign Businesses?

Ownership interests in certain foreign corporations, partnerships, and other entities can create additional international reporting requirements.

Depending on the structure and ownership involved, forms beyond Form 8938 may also be required.

International business ownership should therefore be reviewed separately rather than treated the same as an ordinary foreign bank account.

What If You Live Abroad?

Living outside the United States does not automatically eliminate FATCA reporting requirements.

In fact, Form 8938 provides different asset thresholds for qualifying taxpayers living abroad.

U.S. citizens and other qualifying taxpayers living overseas should consider both their income tax obligations and international information-reporting requirements.

What Happens If Form 8938 Is Not Filed?

Failure to file a required Form 8938 can potentially result in penalties and other tax consequences.

Additional issues may arise when foreign income associated with unreported assets was also omitted from a tax return.

If you discover that foreign assets were not properly reported in previous years, the appropriate corrective approach depends on your specific circumstances.

Keep Foreign Financial Records Organized

International reporting becomes much easier when records are maintained throughout the year.

Consider keeping documentation showing:

• Foreign account ownership

• Maximum account values

• Foreign investment holdings

• Income received

• Foreign taxes paid

• Foreign business interests

• Relevant financial statements

Organized records can help determine which international forms may be required.

Understand Your FATCA Reporting Responsibilities

Foreign financial reporting can involve overlapping requirements, and filing one international form does not necessarily satisfy another.

James Ridout CPA provides FATCA and Form 8938 assistance, FBAR reporting, foreign income tax preparation, expat tax services, and international tax guidance.

Have financial accounts or assets outside the United States?

Schedule a consultation with our team to determine which reporting requirements may apply.