The Foreign Account Tax Compliance Act or FATCA is essential reading for US expats. The rules are aimed at stamping out tax evasion by American taxpayers who hide money or other assets in unreported offshore accounts.
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The US Internal Revenue Service (IRS) lists offshore avoidance as one of the ‘dirty dozen’ ways taxpayers try to conceal their money from the tax man.
Cash and investments are secretly placed offshore and accessed with debit cards, credit cards of wire transfers in the hope the IRS will not find the income or gains.
This crackdown has a big impact on US expats because their residence status means they must manage their money through foreign financial institutions.
The IRS says FATCA has helped recoup more than $10 billion in taxes that would have been lost to tax avoidance from 100,000 or so taxpayers, but expats argue the rules have led to foreign banks refusing to offer then banking facilities, mortgages or loans.
Foreign Account Tax Compliance Act (FATCA)
FATCA stands for the Foreign Account Tax Compliance Act and is an American law that affects every financial institution outside the States.
Introduced by President Barack Obama’s government in 2010, FATCA demands any foreign financial institution must identify accounts held by or for any American customers
If the accounts reach certain value thresholds, the FFI must tell the IRS.
The IRS compares the FATCA report with expat tax filings.
If the report details undeclared cash or investments, the taxpayer is asked to explain why this was not included in the tax filing and could face significant financial penalties.
The IRS publishes a list of FATCA registered FFIs every month. The list details 360,000 FFIs across around 230 countries and territories.
The top 10 countries with FATCA registered FFIs account for nearly two out of every three registrations – a total of more than 222,000. Top of the list is the Cayman Islands with 71,000 or a third of all FATCA registrations, with another 33,755 in the second place UK. Japan and Brazil tick up another 50,000 FATCA registrations between them.
Repeal FATCA controversy
FATCA has stirred controversy for a decade, with President Donald Trump pledging to repeal the law when he won office.
However, despite repeal campaigners losing several high-profile court cases and support in Congress, Trump has not acted to change the law.
US expats claim many FFIs practically fire their American customers, so they do not have to spend time and money to follow FATCA rules.
FATCA For Expats
The irony is although some FFIs prefer not to deal with US expats, the anomalies of the American tax system create their FATCA problems, not the FFIs.
Once someone is American, they are American for life even if they don’t know it.
The only way out is to renounce citizenship.
The US tax system is one of a handful in the world based on citizenship rather than residence.
The IRS requires any US citizen to declare their worldwide income and gains by filing a tax return every year regardless of where they live.
Checking if you are an Accidental American
This covers Accidental Americans, who the IRS claims as taxpayers.
Accidental Americans are born mostly when moving countries as a child, not made.
Examples of Accidental Americans considered US taxpayers by the IRS include:
- Moving countries in childhood – A child born in the USA but brought up from an early age overseas may believe they have another nationality, especially if they never return to America
- Confused parents – Parents from the USA may not realise their child born in another country is American
- Foreign citizenship – Becoming a citizen of another country does not mean someone loses their American citizenship
- Passport control – Allowing a passport to expire does not end US citizenship
FATCA, FBARs And Form 8938
Expats do not have to do anything to follow FATCA – the law exclusively demands FFIs directly file details of accounts under American taxpayer control with the IRS.
There’s no taxpayer involvement. No permissions, no forms to sign and no appeals.
But taxpayers do have to file information about their offshore money and investments with the IRS when filing their annual tax return.
FBAR or Report of Foreign Bank and Financial Accounts forms are for taxpayers to report one or more foreign accounts with a total value of more than $10,000 at any time during the tax year.
Expats with foreign assets valued at $200,000 or more must file a Form 8938. The threshold doubles for married taxpayers even if only one partner lives overseas. Married couples file one form covering the offshore holdings of both partners.
A Form 8938 is filed with an FBAR, the choice is not an either/or.
FATCA Frequently Asked Questions
Many American expats have failed to understand that FATCA applies to them regardless of where they live and how long they have spent away from the USA.
FATCA affects the finances of expats in just about every country.
Here are some answers to frequently asked question about FATCA and US expats.
What does FATCA stand for?
Why was FATCA introduced?
What is a foreign financial institution (FFI)?
What’s the Bona Fide Resident Test?
What about the Physical Presence Test for expats?
Who are ‘accidental Americans’?
Where do US expats live?
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