What is FATCA and how does it affect US expats?
Published on December, 21 2017
Updated on June 17, 2024
by Sparsh Ganeriwala
Sparsh Ganeriwala, an IRS Enrolled Agent with over 11 years of expat tax experience, specializes in filing US taxes for Americans living in Canada, US/Foreign Trusts, and GILTI Tax.
Table of Contents
The Foreign Account Tax Compliance Act (FATCA) is a US law requiring foreign banks to report information about accounts held by US taxpayers to the IRS. This law impacts US expats by requiring them to follow strict reporting rules.
How can US expats stay compliant with FATCA?citizen?
To comply with FATCA, US expats must accurately report their foreign bank accounts on their tax returns and other forms.
- Check Bank Account Reporting on Schedule B: Ensure your foreign bank accounts are correctly reported on Schedule B of your tax return.
- File FBAR Forms: Submit Foreign Bank Account Reporting (FBAR) forms detailing your foreign bank accounts and their highest balance during the year.
- Match Bank Reports with IRS Records: Make sure the information reported by your banks matches what you report to the IRS.
Why is FBAR important for US expats?
FBAR (Foreign Bank Account Reporting) has been required since the 1970s. It involves reporting the bank’s name, address, account number, and highest balance. Not complying with FBAR can lead to severe penalties starting at $10,000 (to be adjusted for inflation) and possible criminal charges.
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What about money flowing between my different bank accounts regarding FBAR reporting?
US expats often worry about fluctuating account balances due to transactions like loans, salary, and moving money between their accounts. This is not a problem. The important thing to remember is to accurately report your highest balance during the year and your balance on December 31.
If you have two bank accounts and you move $6,000 from one bank account to the other, and that creates the highest balance in each of those two accounts, then you report both accounts, and you report the highest balance of $6,000 for each account.
It doesn’t mean you have or had $12,000 unaccounted for. You’re simply required to report the highest balance for whatever reason.
What other important IRS forms should US expats be aware of?
- Form 8938 – Statement of Specified Foreign Financial Assets: This form must be filed with your tax return if your foreign financial assets exceed certain thresholds. The thresholds depend on your marital status, filing status, and residency.
- Form 5471 – Information Return of US Persons With Respect to Certain Foreign Corporations: This form is required if you own 10% or more of a foreign corporation. It provides detailed information about the corporation’s financial status and your involvement in it.
- Form 3520 – Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts: If you receive a large gift from a foreign person or have transactions with a foreign trust, you need to file this form.
- Form 3520-A – Annual Information Return of Foreign Trust with a US Owner: If you own a foreign trust under grantor rules, this form must be filed annually. It provides information about the trust’s activities, income, and distributions.
- Form 8621 – Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund: This form is necessary if you hold shares in a passive foreign investment company (PFIC). It details the income and distributions from the PFIC.
How can US expats ensure accurate reporting and avoid penalties?
The penalties for not filing the forms above can be steep, ranging from a chunk percentage of your income to criminal penalties. To avoid them, US expats should:
- Disclose all foreign accounts to their tax preparers.
- Ensure information for all forms, including FBAR, is accurate.
- Keep thorough records of all financial transactions.
Why is it important to consult with a tax professional?
Consulting with a tax professional specializing in expat tax issues can help ensure compliance with all reporting requirements and avoid costly mistakes. They can provide guidance on the specific requirements based on your circumstances and help you stay in compliance with US tax laws.
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