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Under FATCA, certain U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets. There are serious penalties for not reporting these financial assets . This FATCA requirement is in addition to the long-standing requirement to report foreign financial accounts on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (formerly TD F 90-22.1). U.S. taxpayers who do not have to file an income tax return for the tax year do not have to file Form 8938, regardless of the value of their specified foreign financial assets. As with the FBAR, not filing a FATCA will have serious penalties.
FATCA requires individuals to report specified foreign financial assets on Form 8938 and it comes separately from FBAR, which means they don’t substitute each other. If you fail to file Form 8938, then you will face a penalty of $10,000 and 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). There is also an additional substantial understatement penalty of 40% on underpayments of tax that is attributable to non-disclosed foreign financial assets. The Foreign Bank Account Reporting is introduced so as to prevent taxpayers from avoiding taxes by hiding their financial assets abroad. You need to file FinCEN 114 if you have one or more foreign financial accounts with an aggregate total value that exceeds $10,000 at any time during the tax year.
“FATCA” requires specified individuals to report ownership of specified foreign financial assets if the total value exceeds the applicable reporting threshold. Form 8938, Statement of Specified Foreign Financial Assets, was created for this purpose. Failure to include the Form 8938, if required, could lead to significant penalties.
Signed into law in 2010, the purpose of FATCA is to combat tax evasion in the wake of the financial crisis of 2008, as part of the HIRE Act. For details on what these thresholds are, please read our previous blogs on the subject. For now, we will focus on the financial and legal ramifications of FATCA for those entities and people who are required to report.
(IRS Form 1116 is normally used to credit foreign taxes upon passive income.) Another source from which FATCA intends to raise revenue is in the identification of a wider population of US persons. However, the majority (82%) of overseas US persons filing owe no tax to the US .
Automatic extensions for expats living abroad or additional extensions to October 15 can provide more time to collect needed information from foreign financial institutions and determine your filing requirements. If you are a specified domestic entity, you satisfy the reporting threshold only if the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
The maximum penalty in non-willful nondisclosure is $50,000 per tax return. As of January 2013, only individuals are required to report their foreign financial assets. At a later time, a limited set of U.S. domestic entities also may have to report their foreign financial assets, but not for tax years starting before 2013. There are some exceptions to the requirement that you file Form 8938. For example, if you do not have to file a U.S. income tax return for the year, then you do not have to file Form 8938, regardless of the value of your specified foreign financial assets.
And, keep in mind, these penalties are in addition to any back taxes that must be paid, along with interest on said back taxes. Unlike the FBAR, which is mainly focused on items such as accounts an insurance policies, FATCA Form 8938 is more comprehensive.
FFIs that do not comply with FATCA will face a 30% withholding of their own from U.S.-source income. This is a steep penalty to pay for many FFIs that do regular business with U.S.-based individuals and entities. The Foreign Account Tax Compliance Act is a key provision of U.S. international tax law.
The purpose of FATCA is to prevent tax evasion of U.S. individuals who own offshore assets and accounts. FATCA states that particular U.S. taxpayers with financial assets outside of the U.S. must report them on the “Statement of Specified Foreign Financial Assets,” also known as Form 8938. When filing Form 8938, it must be attached to the taxpayer’s standard annual income tax return. As Form 8938 is filed with your U.S. income tax return, due dates applicable to Form 1040 apply.
While this may seem like a pricey option, it is no doubt better than incurring tens or hundreds of thousands of dollars in penalties. As discussed, this also applies to Foreign Financial Institutions — a 30% withholding of U.S.-source income in this context could easily mean millions of dollars. Thus, it becomes of the utmost im
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