Understanding What FATCA is for Individuals – 20 Common Questions

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Understanding What FATCA is for Individuals – 20 Common Questions (Golding & Golding)

Understanding What FATCA is for Individuals – 20 Common Questions (Golding & Golding)

Understanding What FATCA is for Individuals – 20 Common Questions

International Tax Law is riddled with acronyms. One of the more confusing acronyms that was recently introduced to the world of IRS offshore compliance and foreign reporting is FATCA.

FATCA is the:

  • Foreign
  • Account
  • Tax
  • Compliance
  • Act. 

FATCA is not the same as FBAR (although it is similar). FATCA may change the way you have to prepare your tax returns. It can make a simple tax return, difficult — and a difficult tax return, well…more difficult.

Let’s try to simply FATCA as much as we can:

What is FATCA?

FATCA is the Foreign Account Compliance Act.  It is an international act designed to facilitate compliance for U.S. Taxpayers, Foreign Financial Institutions, and other intermediaries with proper reporting of Specified Foreign Financial Assets.

In recent years, the IRS has increased enforcement of offshore and foreign reporting – with the goal of combatting, reducing, and eliminating offshore/foreign tax fraud and evasion.

What is the Purpose of FATCA?

The main purpose of FATCA is to reduce offshore and foreign tax fraud, facilitate tax compliance and ensure the IRS and U.S. government can keep tabs on your foreign assets.

Who Has to Comply with FATCA?

Any U.S. taxpayer (foreign or U.S. resident) who has to file a tax return may become subject to FATCA Reporting.  For individuals and other entities filing U.S. tax returns, the main reporting requirement is filing form 8938.

Unlike other international reporting forms such as an FBAR, 5471 or 8865 – Form 8938 is only required if you have to file a US tax return.  The other forms we just mentioned have to be filed irrespective of whether a person meets threshold having to file a US tax return or not.

Stated another way, a person does not have to file a tax return just to include a form 8938 for FATCA Reporting. If they did not otherwise have to file a tax Return, then the Form 8938 is not required.

How Many Foreign Countries Entered into FATCA Agreements?

More than 110 hundred different countries (114) have entered into FATCA Agreements. These agreements are more specifically referred to as intergovernmental agreements (IGA), and there are two main types of agreements.

To try to put this into a better perspective for you, while the United States has entered into bilateral tax treaties with about 60 different countries, they have entered into almost twice as many agreements regarding FATCA.

How Many Foreign Institutions Comply with FATCA?

At present time, it is estimated that more than 300,000 foreign financial institutions have agreed to report to the United States regarding offshore accounts and assets of U.S. Account holders.

What if My Bank is in a Non-FATCA Country?

Even if your bank is in a non-FATCA country, it is important to understand that many institutions in non-FATCA countries are still reporting. 

When is FATCA Reporting Due?

Form 8938 is required to be filed along with your tax return. Therefore, depending on whether the filer is an individual or an entity, and whether or not the person is filing on extension or not will determine when the reporting is due.

Since form 8938 is a part of your tax return, if you file an extension for the tax return, then by default the time to file your form 8938 would also be on extension.

What Types of Assets Have to Be Reported?

Many different types accounts and assets have to be included, but for the most part they will include the following types of assets:

  • Bank Accounts
  • Investment Accounts
  • Certificates Of Deposit
  • Stock Accounts
  • Mutual Funds (Possible Overlap with 8621)
  • Foreign Corporation ownership (Possible Overlap with 5471)
  • Foreign Partnership ownership (Possible Overlap with 8865)

*Exceptions, Exclusions and Limitations apply.

Does that Include Cryptocurrency?

That’s a good question.  While there is no specific guidance on form 8938 and cryptocurrency, the general consensus amongst experienced practitioners is that depending on whether or not your cryptocurrency is in account or personal wallet will help determine whether you may have to report the asset — or whether it is not considered a specified foreign financial asset.

What if I reported the Asset on a Different Form?

Generally (although exceptions, exclusions, and limitations apply) a person does not have to report the same asset on both the form 8938 and other corresponding form (although that is not true for the FBAR).

For example, if a person has to file a form 5471 due to ownership of a foreign corporation, they do not have to then re-identify the same asset, in the same year, on form 8938.

How do Individuals and Entities Report FATCA?

There are two main reporting culprits when it comes to individuals and entities having to report under FATCA.

The first, is form 8938 described above.

The second, is when a person receives a FATCA Letter from a foreign financial institution (FFI).

What is a FATCA Letter?

A FATCA Letter is a letter from your foreign financial institution requesting that you acknowledge and confirm your US status.

Generally, the FFI will ask you to submit either a W-9 which is for U.S. Persons, or a W-8 BEN which is for non-US persons.

When a person is considered a US person, the FFI will have a disclosure requirement to the IRS. And since the foreign financial institutions do not want to get into trouble with the U.S., they generally err on the side of compliance.

Another thing to keep in mind is generally after the institution has your information — they will send it to the IRS.

Therefore, it is important to understand that there are some serious ramifications involving the FATCA Letter, and even though it comes from a foreign financial institution and not directly from the IRS, non-compliance can have some serious consequences.

What Are the Thresholds for Reporting FATCA?

There are four main thresholds for individuals is as follows:

  • Single or Filing Separate (in the U.S.): $50,000/$75,000
  • Married with a Joint Returns (In the U.S): $100,000/$150,000
  • Single or Filing Separate (Outside the U.S.): $200,000/$300,000
  • Married with a Joint Returns (Outside the U.S.): $400,000/$600,000

What if the Asset Did Not Earn Income?

It does not matter whether or not the asset earned or generated any income when it comes to FATCA. 

In other words, the purpose of FATCA is reporting. Therefore, whether or not the foreign assets generated income is not as important as whether or not the type of asset is considered a specified foreign financial asset.

*If the asset did earn income, the income is identified on Form 8938.

Do I Report Foreign Real Estate?

It depends. If you have individual direct ownership over a foreign Real estate property – even if it generates income – then it is not reported for FATCA.

It is important to note that you still have to report the income (even if the income results in ‘negative income’ due to expenses, etc.) but the actual individual ownership of the foreign property does not have to be reported for FATCA.

Alternatively, if you own an entity such as a Sociedad Anonima, or other foreign trust that holds real estate, then the entity has to be included, even if all it owns is foreign real estate

(Whether or not you can disregard the entity or other tax planning tool or technique to minimize reporting is beyond the scope of this article)

What if I Did Not file the Form in Prior Years?

If you did not file the form in prior years, you cannot just begin “reporting going forward.”

You have to first (or simultaneously) go back and fix the prior year(s) non-reporting before filing the current year. 

That might mean applying for an extension in the current year, to give you sufficient time to amend the prior-year returns.

If you just started reporting going forward, this is considered a Quiet Disclosure or Silent Disclosure (an intentional omission of prior year returns) — which can have some serious ramifications.

What are the Penalties for Not Reporting FATCA?

If you fail to timely file a correct Form 8938 or if you have an understatement of tax relating to an undisclosed specified foreign financial asset.

As provided by the IRS:

 

“Failure-To-File Penalty If you are required to file Form 8938 but do not file a complete and correct Form 8938 by the due date (including extensions), you may be subject to a penalty of $10,000.

 

Continuing failure to file.  If you do not file a correct and complete Form 8938 within 90 days after the IRS mails you a notice of the failure to file, you may be subject to an additional penalty of $10,000 for each 30-day period (or part of a period) during which you continue to fail to file Form 8938 after the 90-day period has expired.

 

The maximum additional penalty for a continuing failure to file Form 8938 is $50,000.”

 

Can I Just Start Filing This Year?

No, if you just start filing the current year that is considered a sign disclosure/choir disclosure as explained above.

Can I Go To Jail?

Yes, but you are probably not going to jail or prison (at least because of FACTA).

Only a few individuals have been indicted with criminal charges for FATCA (and generally for much more serious, and complex issues other than non-filing of Form 8938).

But, the FATCA law is relatively, enforcement not really beginning until 2014.

In addition, with so many countries working together and in conjunction with the United States to facilitate offshore compliance, you should try to stay in compliance.

How Can I File for Past Years?

The best and most effective way for getting into compliance is through one of the approved offshore voluntary disclosure programs, otherwise known as tax amnesty.

In addition, a person may qualify for reasonable cause instead of full-blown amnesty, but it is a totality of the circumstances analysis based on each person’s individual facts and circumstances.

Should I Retain an Attorney?

Yes. Whenever a person is making a proactive representation to the Internal Revenue Service, it is absolutely crucial that they retain an attorney.

Only with an attorney will your communications remain strictly confidential.

There is no attorney-client privilege with Enrolled Agent, CPA or other accountant — unless that person is also an attorney.

What are some Other Common Forms?

In addition to form 8938, some of the more common forms person may have to file is as follows:

  • FBAR (Report of Foreign Bank and Financial Account Form)
  • From 3520 (Receiving a Foreign Gift or Trust Distribution)
  • Form 3520-A (Foreign Trust)
  • Form 5471 (FOREIGN CORPORATION)
  • Form 5472 (Foreign/U.S. corporate ownership)
  • Form 8621 (PFIC) foreign investment aka Passive Foreign Investment Company
  • Form 8865 (Foreign Partnership)

Beat the IRS to the Punch!

If you are out of compliance for not properly disclosing foreign income, accounts, assets, and/or investments — and are not under audit or examination — you may consider submitting to IRS Voluntary Disclosure (IRM, Streamlined or Reasonable Cause) in order to get into compliance.

What Type of Attorney Should I Hire?

IRS Voluntary Disclosure is a specialized area of law. An IRS Voluntary Disclosure is a complex undertaking. It requires the coordination of several moving parts, including strategy development, Tax Preparation, Legal Analysis, Negotiation and more.

You should hire a Tax Attorney who has the following credentials:

  • ~20 Years of Private Practice experience representing his/her own clients
  • Experienced in Criminal and Civil Tax Litigation
  • Experienced representing clients in Eggshell and Reverse Eggshell Audits.
  • Advanced Tax Degree (LL.M.)
  • Preferably a Board-Certified Tax Law Specialist

We Specialize in Safely Disclosing Foreign Money

We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)

Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

Examples of areas of tax we handle

Who Decides to Disclose Unreported Money?

What Types of Clients Do we Represent?

We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.

You are not alone, and you are not the only one to find himself or herself in this situation.

Sean M. Golding, Board-Certified Tax Law Specialist

Our Managing Partner, Sean M. Golding, Board-Certified Tax Law Specialist  earned an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)

Mr. Golding and his team have successfully handled several hundred IRS Offshore/Voluntary Disclosure Procedure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.

Less than 1% of Tax Attorneys Nationwide are Board-Certified Tax Law Specialists 

The Board-Certified Tax Law Specialist exam is offered in many states, and is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. Certification also requires the completion of significant ethics and experience requirements.

In California alone, out of more than 200,000 practicing attorneys (with thousands of attorneys practicing in some area of tax law), less than 350 attorneys are Board-Certified Tax Law Specialists.

Beware of Copycat Law Firms

Unlike other attorneys who call themselves specialists or experts in Voluntary Disclosure but are not “Board-Certified,” handle 5-10 different areas of tax law, purchase multiple keyword specific domain names, and even practice outside of tax, we are absolutely dedicated to Offshore Voluntary Disclosure.

*Click here to learn the benefits of retaining a Board-Certified Tax Law Specialist with advanced tax credentials.

IRS Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

A Penalty for failing to file Form 8938

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 3520

The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

A Penalty for failing to file Form 3520-A

The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

A Penalty for failing to file Form 5471

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 5472

The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.

A Penalty for failing to file Form 926

The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

A Penalty for failing to file Form 8865

Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Fraud penalties imposed under IRC §§ 6651(f) or 6663

Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)

Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)

If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

An Accuracy-Related Penalty on underpayments imposed under IRC § 6662

Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty

Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)

Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.  Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

A person convicted of tax evasion

Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.  A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000.  A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.

What Should You Do?

Everyone makes mistakes. If at some point you discover that you should have been reporting your foreign income, accounts, assets or investments, the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure programs.

Be Careful of the IRS

With the introduction and enforcement of FATCA for both Civil and Criminal Penalties, renewed interest in the IRS issuing FBAR Penalties, crackdown on Cryptocurrency (and IRS joining J5), the termination of OVDP, and recent foreign bank settlements with the IRS…there are not many places left to hide.

4 Types of IRS Voluntary Disclosure Programs

There are typically four types of IRS Voluntary Disclosure programs, and they include:

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