FATCA Requirements: Foreign Account Tax Compliance Act

The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. FATCA requires U.S. taxpayers to report certain foreign financial assets on Form 8938, Statement of Specified Foreign Financial Assets, which is filed with your annual income tax return. FATCA was designed to improve tax compliance involving foreign financial assets and offshore accounts, and it has significantly increased the reporting obligations for U.S. taxpayers with international financial interests.

FATCA operates alongside other reporting requirements, most notably the FBAR (Foreign Bank Account Report) requirement. While there is some overlap between FATCA and FBAR, they are separate requirements with different thresholds, different filing procedures, and different penalties. Many taxpayers with foreign accounts may need to file both forms, so understanding the requirements of each is important.

Who Must File Form 8938?

The requirement to file Form 8938 depends on whether you meet the reporting threshold, which varies based on your filing status and whether you live in the United States or abroad. The thresholds are different for U.S. residents and U.S. persons living abroad, reflecting the different circumstances of these groups.

For U.S. residents, the thresholds are: single taxpayers or married taxpayers filing separately must file if the total value of specified foreign financial assets was more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. Married taxpayers filing jointly must file if the total value exceeded $100,000 on the last day of the tax year or $150,000 at any time during the year.

For U.S. persons living abroad, the thresholds are significantly higher: $200,000 on the last day of the tax year or $300,000 at any time during the tax year for single taxpayers or married taxpayers filing separately. Married taxpayers filing jointly living abroad must file if the value exceeded $400,000 on the last day of the year or $600,000 at any time during the year.

These thresholds apply to the aggregate value of all specified foreign financial assets. If you're married filing jointly, you combine the value of assets owned by both spouses to determine if you meet the threshold.

What Assets Must Be Reported?

Specified foreign financial assets that must be reported on Form 8938 include several categories. Financial accounts maintained by a foreign financial institution are reportable, including bank accounts, securities accounts, and other accounts with foreign banks or financial institutions. Stock or securities issued by foreign entities are reportable if not held in a financial account, as are interests in foreign entities such as partnerships, corporations, trusts, or estates.

Other financial instruments or contracts with a foreign issuer or counterparty may also be reportable. However, certain assets are excluded, including assets held in accounts maintained by U.S. financial institutions, certain retirement accounts, and assets reported on other forms such as Form 3520 (foreign trusts) or Form 5471 (controlled foreign corporations), though you must note these on Form 8938.

The value of assets must be determined in U.S. dollars, using the exchange rate in effect on the last day of the tax year. For assets that don't have a readily ascertainable value, you must provide a reasonable estimate and describe the method used to determine the value.

FATCA vs. FBAR

It's important to understand that FATCA (Form 8938) and FBAR (FinCEN Form 114) are separate requirements with important differences. Form 8938 is filed with your income tax return and is processed by the IRS, while the FBAR is filed separately with FinCEN through the BSA E-Filing System.

The thresholds are different: FBAR has a lower threshold of $10,000, while FATCA thresholds are higher (starting at $50,000 for most U.S. residents). The asset definitions also differ: FBAR focuses on accounts maintained with financial institutions, while FATCA includes a broader range of foreign financial assets. Additionally, the filing deadlines differ: Form 8938 is due with your tax return (including extensions), while FBAR has its own deadline of April 15 (with automatic extension to October 15).

Many taxpayers will need to file both forms if they have foreign accounts. The information reported may overlap but is not identical, so both forms must be completed accurately. Failing to file one form doesn't excuse the requirement to file the other.

Penalties

Failure to file Form 8938 when required can result in significant penalties. The initial penalty is $10,000 for failure to disclose, with additional penalties of $10,000 for each 30-day period (or fraction thereof) that the failure continues after the IRS sends notice of the failure, up to a maximum of $50,000. These penalties can add up quickly, making compliance important.

If the failure to file is due to reasonable cause and not willful neglect, the penalties may be waived. However, establishing reasonable cause can be difficult, particularly if you were aware of the assets but didn't understand the filing requirement. The IRS has been aggressive in enforcing FATCA reporting requirements, so taking these obligations seriously is essential.

In addition to civil penalties, criminal penalties may apply in cases of willful failure to file. These can include fines of up to $100,000 or imprisonment for up to one year, or both. While criminal prosecution is relatively rare, the potential consequences make compliance essential.

If you have failed to file Form 8938 in prior years, you should consider consulting with a tax professional about options for coming into compliance. The IRS has various programs for taxpayers with unreported foreign assets, though these programs have specific requirements and may involve penalties.