US Expats – Foreign Financial Assets Reporting
FATCA is something every American Expat should be concerned with !
FATCA Solutions For American Expats
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Globally aware and sophisticated Americans may well wish to invest into non US markets to benefit from emerging markets or more traditionally based strategies giving, potentially, higher levels of return and a more balanced and risk equalised portfolio. This is where the concept of a Passive Foreign Investment Company (“PFIC”) come into consideration.
The IRS define a PFIC as “… any foreign corporation if 75 percent or more of its gross income is passive income or if 50 percent or more of its assets are assets that produce, or are held to produce, passive income”. What that means is generally any non US mutual fund, bond or company will be treated as a PFIC.
A non-US fund can elect to provide the IRS detailed information such that the US investors can treat the investment return as currently taxable in the US, however most non US funds are not willing to take on this additional compliance and reporting burden so around 95% of all non US mutual funds are classified as a PFIC.
The exact taxing profile of investments made into a PFIC are highly complex and often the cost of merely filing these investments can outweigh the investment return. It is imperative that advice is taken from a competent US attorney if you believe you have any PFIC investments – however to give a very simple overview, every individual investment made into a PFIC should be reported on a separate form to the IRS (Form 8621) which shows the amount of the investment return and the length of time that the asset has been held. Irrespective of whether the return is classified as income or capital gain, the return will be taxed as income, often at the highest marginal rates, broken down on a proportionate basis over the total number of years during which the asset was held. An additional interest charge is also levied to compensate the US Government for the perceived impermissible deferral of tax payments.
Whilst this isn’t a major issue for those who have held these investments for 1-2 years – it can cause havoc for individuals who have held these assets for many years with severe tax penalties.
It is also worth noting that the IRS have the ability to ‘look through’ traditional investment schemes and trusts that have US participants. Trusts should be fully reported to the IRS as a matter of general compliance (Forms 3520 and 3520-a) and the US will seek to tax the underlying beneficiary as if they were holding the investments personally. Therefore most of these arrangements offer no protection from PFIC charges what so ever.
As the US supports an equalized tax system whereby residents and non residents are treated alike, PFIC charges also apply to US physical residents too. So returning to the US with these investments does not solve the issue!
Information for U.S. Taxpayers on Form 8938 Requirements
Under FATCA, certain U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS, generally using Form 8938, Statement of Specified Foreign Financial Assets. The Form 8938 must be attached to the taxpayer’s annual tax return.
- Uncertain whether you have to file? Generally, aggregate value of these assets must exceed $50,000, but in some cases, the threshold may be higher.
- Unclear about what qualifies as a specified foreign financial asset? Here’s a chart that can help.
- You may also have to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). This comparison table will help you figure out whether you also need to file the FBAR.
- Still looking for more answers? View the frequently-asked-questions (FAQs) for Form 8938 for information on real estate, foreign assets held in U.S.-based financial accounts, foreign pensions, valuing certain assets and more.
Failure to report foreign financial assets on Form 8938 may result in a penalty of $10,000 (and a penalty up to $50,000 for continued failure after IRS notification). Further, underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40 percent.
The IRS anticipates issuing regulations that will require a domestic entity to file Form 8938 if the entity is formed or used to hold specified foreign financial assets and the assets exceeds the appropriate reporting threshold. Until the IRS issues such regulations, only individuals must file Form 8938. For more information about domestic entity filing,
see Notice 2013-10. Page Last Reviewed or Updated: 04-Mar-2013
Foreign Account Tax Compliance Act
The Foreign Account Tax Compliance Act (FATCA) is an important development in U.S. efforts to improve tax compliance involving foreign financial assets and offshore accounts.
Under FATCA, U.S. taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS. This reporting will be made on Form 8938, which taxpayers attach to their federal income tax return, starting this tax filing season.
In addition, FATCA will require foreign financial institutions to report directly to the IRS information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest.
Comparison of Form 8938 and FBAR Requirements
The new Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts). Individuals must file each form for which they meet the relevant reporting threshold.
| Form 8938, Statement of Specified Foreign Financial Assets | Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR) | |
| Who Must File? | Specified individuals, which include U.S citizens, resident aliens, and certain non-resident aliens that have an interest in specified foreign financial assets and meet the reporting threshold | U.S. persons, which include U.S. citizens, resident aliens, trusts, estates, and domestic entities that have an interest in foreign financial accounts and meet the reporting threshold |
| Does the United States include U.S. territories? | No | Yes, resident aliens of U.S territories and U.S. territory entities are subject to FBAR reporting |
| Reporting Threshold (Total Value of Assets) | $50,000 on the last day of the tax year or $75,000 at any time during the tax year (higher threshold amounts apply to married individuals filing jointly and individuals living abroad) | $10,000 at any time during the calendar year |
| When do you have an interest in an account or asset? | If any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the account or asset are or would be required to be reported, included, or otherwise reflected on your income tax return | Financial interest: you are the owner of record or holder of legal title; the owner of record or holder of legal title is your agent or representative; you have a sufficient interest in the entity that is the owner of record or holder of legal title.Signature authority: you have authority to control the disposition of the assets in the account by direct communication with the financial institution maintaining the account.
See instructions for further details. |
| What is Reported? | Maximum value of specified foreign financial assets, which include financial accounts with foreign financial institutions and certain other foreign non-account investment assets | Maximum value of financial accounts maintained by a financial institution physically located in a foreign country |
| How are maximum account or asset values determined and reported? | Fair market value in U.S. dollars in accord with the Form 8938 instructions for each account and asset reportedConvert to U.S. dollars using the end of the taxable year exchange rate and report in U.S. dollars. | Use periodic account statements to determine the maximum value in the currency of the account.Convert to U.S. dollars using the end of the calendar year exchange rate and report in U.S. dollars. |
| When Due? | By due date, including extension, if any, for income tax return | Received by June 30 (no extensions of time granted) |
| Where to File? | File with income tax return pursuant to instructions for filing the return | Mail to:Department of the Treasury Post Office Box 32621 Detroit, MI 48232-0621For express mail to:IRS Enterprise Computing Center ATTN: CTR Operations Mailroom, 4th Floor 985 Michigan Avenue Detroit, MI 48226 Certain individuals may file electronically at BSA E-Filing System |
| Penalties | Up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of a failure to disclose, for a potential maximum penalty of $60,000; criminal penalties may also apply | If non-willful, up to $10,000; if willful, up to the greater of $100,000 or 50 percent of account balances; criminal penalties may also apply |
| Types of Foreign Assets and Whether They are Reportable | ||
| Financial (deposit and custodial) accounts held at foreign financial institutions | Yes | Yes |
| Financial account held at a foreign branch of a U.S. financial institution | No | Yes |
| Financial account held at a U.S. branch of a foreign financial institution | No | No |
| Foreign financial account for which you have signature authority | No, unless you otherwise have an interest in the account as described above | Yes, subject to exceptions |
| Foreign stock or securities held in a financial account at a foreign financial institution | The account itself is subject to reporting, but the contents of the account do not have to be separately reported | The account itself is subject to reporting, but the contents of the account do not have to be separately reported |
| Foreign stock or securities not held in a financial account | Yes | No |
| Foreign partnership interests | Yes | No |
| Indirect interests in foreign financial assets through an entity | No | Yes, if sufficient ownership or beneficial interest (i.e., a greater than 50 percent interest) in the entity. See instructions for further detail. |
| Foreign mutual funds | Yes | Yes |
| Domestic mutual fund investing in foreign stocks and securities | No | No |
| Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust for which you are the grantor | Yes, as to both foreign accounts and foreign non-account investment assets | Yes, as to foreign accounts |
| Foreign-issued life insurance or annuity contract with a cash-value | Yes | Yes |
| Foreign hedge funds and foreign private equity funds | Yes | No |
| Foreign real estate held directly | No | No |
| Foreign real estate held through a foreign entity | No, but the foreign entity itself is a specified foreign financial asset and its maximum value includes the value of the real estate | No |
| Foreign currency held directly | No | No |
| Precious Metals held directly | No | No |
| Personal property, held directly, such as art, antiques, jewelry, cars and other collectibles | No | No |
| ‘Social Security’- type program benefits provided by a foreign government | No | No |
Page Last Reviewed or Updated: 25-Feb-2013