What is FATCA?

By

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.

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.

FBARs

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.

Form 8938

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.

More about FBARs and Form 8938s

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?

FATCA is the Foreign Account Tax Compliance Act.

Why was FATCA introduced?

FATCA was the first stage of an international movement to stem the flow of undeclared wealth to offshore tax havens. The aim was to recover lost taxes by making hiding wealth harder.

What is a foreign financial institution (FFI)?

An FFI is far more than just a bank – the definition covers investment funds, insurance companies and deposit taking entities.

What’s the Bona Fide Resident Test?

Around 9 million Americans are expats living in a foreign country, according to official State Department data. Technically, an expat must live outside the US for a full calendar year and cannot take the Bona Fide Resident Test until they have stayed in another country for at least a calendar year. Add to that a few more conditions – 1. You must have a home in that foreign country. 2. You must intend to stay in that country indefinitely.

What about the Physical Presence Test for expats?

This test is much simpler to meet – to become an expat just live in another country for 330 days in any 365-day period – which is great for expats on two-year assignments intending to return home when their job ends.Who are ‘accidental Americans’?

Who are ‘accidental Americans’?

Accidental Americans tend to be born in the US or born overseas to US parents but either leave the States in their early years or never live there. Because the IRS determines taxpayer status by birth rather than residence, many do not realise they have American citizenship and only find out they are US born by accident.

Where do US expats live?

Americans live in just about every country – but most stay close to home. Almost a million live in Mexico, while another 750,000 are in Canada.  India and The Philippines both have expat populations of around 700,000 and another 700,000 live in Europe.