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Understanding Foreign Taxes: FATCA & FBAR and The Implications For Your Taxes

Understanding Foreign Taxes: FATCA & FBAR and The Implications For Your Taxes

Regardless of your level of insight into taxes as an individual or a business, you must understand the concepts of FATCA and FBAR and their differences because to understand and utilize these instruments can result in severe penalties. 


FATCA

FATCA is an acronym for the Foreign Account Tax Compliance Act, a legislation passed by Congress in 2010 as a job stimulus package. Its origin is traced to discovering that some expatriate Americans weren't paying their share of taxes, and wealthy individuals were also underpaying foreign tax. So the FATCA was passed into law as an income-generating medium for foreign countries that makes them provide information about American account holders. 

Through the FATCA, the IRS can pressure countries known as "Tax havens" such as Switzerland, to ensure that all unpaid and underpaid taxes are remitted. At inception, FATCA worked as America gained billions of dollars in tax revenues from Americans living abroad. This was attributed to the liaison between the IRS and other banking institutions. 

This realization means that if a U.S-born citizen with a U.S contact information wants to transfer funds to a U.S-based account, the foreign bank is expected to provide details about the transaction under the FATCA act. 


FBAR

FBAR stands for foreign bank account report; it is under the FATCA code and used by American taxpayers who live outside the country to declare all foreign assets, including earnings. You are required to file FBAR if you have a foreign bank account with assets that exceed $10,000 in a previous tax year. If you have such a record and fail to file the FBAR, you may face serious consequences. 

More so, even if what you have is only tagged financial interests in a bank account, or if you are a signatory to an account, you are required to file for FBAR. Through FBAR, the IRS wants to know the extent of your association with the $10,000 in a foreign account, and you file your FBAR separately from your regular tax returns. The BIG question at this point is, "What if I don't file the FBAR?" 

Both the FBAR and FATCA are crucial requirements regarding foreign tax, and the IRS will not tolerate the attempts of those who try to engage in tax cheats. While some people unintentionally violate these codes because of a lack of information, it is assumed that as soon as an individual starts earning, they become conversant with all applicable tax laws, which explains why you are reading this material now. 

If you fail to file the FBAR, you might face a $13,000 fine per violation, and this is irrespective of the total amount you own abroad. If the IRS suspects that an individual has hidden assets abroad, the penalty is as high as $124,588 per violation. 


  • Some foreign assets to be reported

  • Financial deposits with accounts held in a foreign financial institution

  • Foreign mutual funds 

  • Domestic mutual funds invested in foreign stocks 

  • Foreign real estate 

  • Personal properties owned in a foreign land such as cars, antiques, and art 

  • Foreign currency held directly 


If you are interested in building a foreign portfolio and want to avoid run-ins with the IRS, please ensure that your FBAR and FATCA are duly filed for a smooth foreign transaction experience. Remember that most of the tax havens' financial institutions will cooperate with the IRS to avoid getting sanctioned. 

If you are unsure how to check your history to ascertain if there is a violation, speak with an expert, provide all transactions' history, and be honest about your foreign assets. You want to always be on the right side of the law with your taxes in a foreign country, and it starts with knowing your FATCA and FBAR. 


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