Since the Foreign Account Tax Compliance Act (FATCA) was passed in 2010, the IRS has used it to identify and prosecute those who attempt to use offshore accounts, trusts, and other entities to conceal income.
The IRS is largely able to do this because of intergovernmental agreements, or IGAs. Under IGAs, foreign financial institutions (FFIs) must report information on U.S.-linked accounts to the IRS, whether directly or through their nation’s taxing authority. Because of IGAs, the IRS can more easily identify taxpayers who fail to report their foreign financial accounts and holdings to the IRS using Form 8938. This makes disclosure paramount since the IRS typically heavily financially penalizes those who do not comply with FATCA.
Call US Tax Help now at this link – get in touch to learn more about how our tax CPAs for American expatriates can assist you with FATCA compliance.
Why Other Nations Have IGAs with the United States Under FATCA
The Foreign Account Tax Compliance Act requires compliance from both foreign financial institutions and individual taxpayers. FATCA requires U.S. taxpayers to disclose various foreign financial accounts and assets, including deposit accounts, custodial accounts, foreign life insurance policies, foreign partnership interests, and foreign stocks. The purpose is to monitor American money overseas, and foreign financial institutions typically also have to report this information to the IRS because of intergovernmental agreements with the United States.
Though taxpayers living in the United States may hold foreign accounts that require reporting, FATCA most often affects expatriates living abroad. Expats specifically reach the reporting threshold if their specified foreign financial assets exceed $200,000 on the last day of the tax year or $300,000 at any point during the tax year. For expats filing annual returns with their spouses, the filing threshold doubles. FATCA reporting is only mandatory for domestic taxpayers when the balance of their foreign financial account or accounts exceeds $50,000. Failure to report covered accounts by Tax Day using IRS Form 8938 can result in significant fines and other civil and criminal tax consequences.
Foreign financial institutions must also make certain disclosures under FATCA. Generally, FFIs must disclose information about U.S.-linked accounts according to terms of the intergovernmental agreement in effect in the jurisdiction. Failure to provide this information to the local taxing authority or the IRS can result in a 30% withholding penalty being assessed against the bank’s U.S. assets and income. Because of this, foreign financial institutions are typically quick to report information about American money overseas. If the IRS notices a discrepancy between information from an FFI and information provided on Form 8938, you can face financial penalties. The initial penalty for FATCA non-compliance is $10,000 and could increase to $50,000 for continued failure to file after being notified by the IRS.
The Different IGAs Nations Have with the United States
IGAs are the intergovernmental agreements the United States has with other countries ensuring that they report U.S.-linked foreign financial accounts to comply with FATCA. There are two IGA models dictating how FFIs get information to the IRS, though it is it is most common for them to first report to their national taxing authority, which will then pass the data along to the United States.
Model 1 IGAs
Under a Model 1 IGA, foreign financial institutions report information about U.S.-linked accounts to their domestic national taxing authority. The national taxing authority then passes that information from all FFIs in the jurisdiction along to the IRS. Many Model 1 IGAs also include an Annex II that lists country-specific deemed compliant financial institutions. Model 1 IGAs are the most common, with these being the agreements in place with popular countries for American expatriates, such as Mexico, Canada, the United Kingdom, and Spain.
Model 2 IGAs
Model 2 IGAs addressed concerns in some nations that FATCA rules could violate local or national laws. Under a Model 2 IGA, FFIs can provide information directly to the IRS instead of the foreign taxing agency acting as the middleman for the data exchange. While not nearly as many countries have Model 2 IGAs with the United States, some examples include Chile, Bermuda, Austria, Switzerland, and Japan.
Does the Nation I Expatriated to Have an IGA with the United States?
If you recently moved abroad or are currently planning your expatriation, it is important to learn about the intergovernmental agreement between the nation you are moving to and the United States. Understanding your reporting requirements for any offshore accounts you may maintain while living abroad is also crucial, as failing to do so could end in expensive financial penalties.
Most countries in the world have agreed to an IGA with the United States. In fact, more than 100 nations have signed an IGA or have one in force with the United States. This means that if you move abroad and open financial accounts or acquire foreign assets, the IRS will likely discover your undisclosed offshore accounts, even if you do not report them to the agency yourself. Concealment of income and offshore accounts can result in serious financial and criminal consequences, even if expats were unaware of FATCA implications and that they had to report their foreign financial assets.
Whether or not a foreign nation has an IGA with the United States, taxpayers would still have to disclose their accounts if they surpass reporting thresholds. As mentioned, this is done using IRS Form 8938. Our tax CPAs for American expatriates can review your foreign financial assets, confirm if you are over the threshold, and complete Form 8938 to file alongside your annual tax return and other documents. If you must file Form 8938, you will most likely also have to submit a Report of Foreign Bank and Financial Accounts (FBAR). The reporting threshold for submitting FBARs is much lower. In fact, if you have a foreign bank account that exceeds $10,000, you have to file an FBAR. Our tax accountants can handle this as well since failing to file an FBAR could also lead to costly financial penalties for expat taxpayers.
Get Help from Our Tax CPAs for Expatriates Today
Call US Tax Help now at this link – get in touch for more about the services our tax CPAs for American expatriates provide.