Exotic places…remote islands…new cultures – what many Americans dream of. It’s now easier than ever for people to move around and build new lives in different countries. Unfortunately, this freedom has given Americans more opportunities to cheat on their taxes. To fight tax fraud, the IRS (Internal Revenue Service, or perhaps more appropriately, Income Reduction Service) in the United States launched a new program to track money around the world. This program has created new reporting requirements for Americans and non-Americans alike, because there’s nothing like making non-citizens subject to rules which should only affect Americans.
How does FATCA work?
The Foreign Account Tax Compliance Act (FATCA) launched in 2010. This bill created new rules for Americans with financial accounts in another country. This includes bank accounts, investment accounts, partnership interests, and trust funds. Americans need to report the value of these foreign accounts to the IRS every year so the IRS can keep track, something they love to do. The government launched this rule to prevent Americans from avoiding taxes by moving their money overseas.
Reporting rules for Americans
Every year, Americans and Green Card holders could need to fill out Form 8938 for the IRS. This form asks them to list information on all their foreign financial accounts and the amount of money they have in each account. Now, the IRS is only interested in accounts over a certain size, because if they ever need to seize someone’s assets, they only want the really big accounts. For example, you only need to report accounts that were either worth at least $50,000 at the end of the tax year or were worth $75,000 or more at some point during the year. If none of your foreign accounts are over this threshold, you don’t need to file under FATCA. At least not until they create another new bill. Oh wait, they did. It’s called FBAR and requires disclosures over $10,000.
If you do have accounts that need to be reported, you need to submit Form 8938 along with your American tax return. If you’re supposed to file and don’t, the IRS could charge a penalty up to $10,000 for a failure to file plus an extra $10,000 for every 30 days you are late, up to a maximum of $60,000. This is the kind of math only the IRS could come up with. Criminal penalties can also apply, so you’ll want to keep your ducks in row to avoid the long arm of the law. And the IRS has a long arm indeed – long enough to wrap around the entire world.
Reporting rules for foreign banks and financial institutions
Foreign banks and financial institutions also need to report to the IRS. Their main responsibility is to show the IRS they are keeping track of the tax status of their account holders so that Americans aren’t using their accounts to avoid taxes. How great is it that the IRS can make other countries and institutions bow down to their needs?
If you’re an American and have a foreign account, the financial institution might ask you to fill out a W-9. This form reports your tax status as an American for the foreign account. Most people will be filing as an individual and will need to report their Social Security Number. If you own your foreign account through a corporation or trust, you’ll need to report the entity’s Taxpayer Identification Number.
Your bank might have other requirements like they need to see your company’s articles of incorporation. Check with your institution to make sure you’ve handled everything properly for FATCA.
Reporting rules for non-Americans
Non-Americans have some very basic reporting requirements as well. This has confused some non-Americans who wonder why they have to fill out paperwork with the IRS while not having anything to do with the United States. They just need to report to their bank or financial institution that they are not American so FATCA doesn’t apply to them. It’s a good thing all 206 sovereign states don’t require this or we’d all be up to our knees in paperwork.
If you need to fill out any paperwork, you’ll likely need to file a W-8. By filing this form, you are claiming an exemption from US reporting requirements because you aren’t American (so again, why do you have to fill out their paperwork??). Your bank might have some more basic requirements, like you need to show your passport, but it shouldn’t take much to handle FATCA.
Unfortunately, FATCA is just one more tax responsibility for people around the world. The good news is the requirements aren’t too bad for most people, but more added stress for Americans.