Posted by Income Taxes and Bookkeeping LLC

What is FATCA (Foreign Account Tax Compliance Act) & Understanding it?

What is FATCA (Foreign Account Tax Compliance Act) & Understanding it?

Don’t get confused by the extended title; FATCA is as simple as any other tax idea you should become conversant with. It refers to a tax law that makes American citizens home and away to file yearly tax reports on their foreign accounts. 

The FATCA was sanctioned in 2010 as a part of the Hiring Incentives to Restore Employment (HIRE) which is the act that endorses transparency in the worldwide financial services sector. FATCA was integrated into the law by President Barack Obama to incentivize businesses to employ unemployed individuals because of the unemployment rates that hit the roof in the 2008 financial crunch. 

The goal of FATCA is to get rid of tax evasion by businesses and individuals in America. These are businesses and people that invest, operate, and earn taxable revenue overseas. Although it is not abnormal to control offshore accounts, the inability to disclose the account is also viewed as illegal because America places taxes on every income and asset of its citizens on a global level. 

The funding for the HIRE incentives was generated from Congress’s inclusion of revenue-generating provisions in the HIRE ACT through FATCA. The FATCA sector also demands that all American taxpayers will report their financial assets outside the country annually. 

Taxing income from the foreign-based assets boosts America’s revenue streams and places all proceeds into its incentive account that enables job stimulation. The U.S citizens who fail to report their overseas accounts, assets, and holdings valued at over $50,000 annually will be penalized. 

There are some requirements to be submitted for FATCA, and these include specified foreign assets, which the IRS lists as: 

  • Foreign stockholdings 

  • Foreign pensions 

  • Foreign hedge funds 

  • Foreign issued life insurance 

  • Foreign real estate is held through an overseas entity. However, you don’t have to report the actual estate. You only need to register the property itself as a foreign asset.

  • You don’t have to file for your foreign home.

For non-American foreign financial institutions and non-financial foreign units are expected to comply with the new law and disclose the identities of American citizens. They are also mandated to report to the IRS the value of their assets in banks or the FATCA intergovernmental agreement. 

The FFIs that don’t cooperate with the IRS will be exempted from the American market and have 30% of withholdable payment withheld from them as a penalty. In this instance, withholdable costs are the income from America’s financial assets in banks and cut across dividends, interests, wages, remunerations, salaries, and wages. 

For reporting thresholds, foreign assets will vary based on if you file a joint income tax return or if the person lives abroad. The IRS maintains that if you live as a single person or file independently from your spouse.

The IRS requests for Form 8938 from the taxpayers that live abroad with the following circumstances:

  • The individual is married and reporting a joint income tax return, with the total value of the specific foreign monetary assets being over $400,000.

  • The individual is not married but filing a joint income tax return with the total value of financial assets at $200,000. 

If forms are not filed, the IRS can penalize the individual with fines getting up to $10,000 and an additional $50,000 if the person continuously fails to file even after the IRS’s notification. 

If you have assets abroad and are keen on getting your taxes right, you need to adhere to the rules binding FATCA. Yes, it may seem like it is a lot of work, but it is required if you don’t want to get into the IRS defaulters list.



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