If you’re an American living in Spain, you may have heard of FATCA (the Foreign Account Tax Compliance Act), however many American expats who have savings and investments abroad aren’t aware that they have a responsibility to file Form 8938.
Mired by controversy due to its extraterritorial reach, FATCA requires US citizens to report their foreign account holdings. The main goal of FATCA is to create transparency and prevent offshore tax evasion, however it has made life difficult for many Americans living abroad, as foreign banks and investment companies also have to report their US account holders under FATCA rules.
In this article, we’ll outline how you can stay FATCA compliant as a US expat living in Spain, and what you can do if you’re behind with your US reporting obligations.
What is FATCA?
Enacted in 2010 as part of the HIRE Act, the Foreign Account Tax Compliance Act is a US federal law that requires foreign financial institutions (FFIs) to report information about financial accounts held by US taxpayers to the Internal Revenue Service (IRS). Even if local privacy laws forbid a direct information transfer, financial firms report to their country’s government, which then shares the info on American account holders with the US under international information sharing agreements. This information includes the US account holders name, address, account number and balance. Because of FATCA, the US government has been successful at gathering data on Americans’ foreign accounts. FATCA’s objective is to ensure US taxpayers accurately report their foreign financial assets to the IRS.
FATCA also requires Americans with foreign offshore accounts to report their account information and balances on IRS Form 8938 with their US tax return if as an individual they meet minimum thresholds.
Noteworthy fact:
FATCA reporting is such a headache for many foreign financial firms that in some cases it leads to their reluctance to accommodate American account holders.
US tax reporting for expats
As a US citizen or resident, you are required to file a US tax return annually regardless of where you reside. Because the United States has a unique citizenship-based tax system (shared by only one other country in the world), you are obligated to report your worldwide income to the IRS. This includes income earned abroad, even if you are liable to pay Spanish income taxes. You can claim US tax credits to avoid double taxation when you file).
How does FATCA reporting work?
US citizens and residents must report their foreign financial accounts, or ‘specified foreign assets’ (as defined by the IRS), if the aggregate value of these accounts exceeds certain thresholds. FATCA also requires expats to file Form 8938 (Statement of Specified Foreign Financial Assets) to disclose their foreign financial assets.
Specified foreign assets can include:
- Foreign pensions
- Foreign stockholdings
- Foreign partnership interests
- Foreign financial accounts
- Foreign mutual funds
- Foreign-issued life insurance
- Foreign hedge fund accounts
- Foreign real estate owned through a foreign entity (Note: You don’t need to report the real estate itself, but the foreign entity counts as a specified foreign financial asset, and its total value includes the real estate’s value)
- Your foreign residence doesn’t require reporting.
What are the FATCA reporting thresholds?
If you’re living abroad filing as single or married filing separately you must file Form 8938 if the total value of your foreign financial assets exceeds $200,000 on the last day of the tax year or $300,000 at any point during the year. For married expats filing jointly, the thresholds double to $400,000 and $600,000, respectively.
For Americans residing In the US, the thresholds are lower, being (for single or married filing separately) $50,000 on the tax year’s final day or $75,000 at any time during the year, and double for married couples filing jointly living in the US.
Do expats have to report FATCA and FBAR Forms?
Yes, expats must report both FATCA Form 8938 and a Foreign Bank Account Report (FBAR) if they meet the respective reporting thresholds. FBAR filing is required for Americans with a total of over $10,000 in their foreign financial accounts at any time during the year, using FinCEN Form 114.
What are the FATCA reporting deadlines?
Expats are granted an automatic extension until June 15th to file their federal tax return, including Form 8938. An additional extension until October 15th can be requested.
What happens if I don’t file Form 8938?
Failure to file FATCA forms can result in severe penalties. These penalties start at $10,000 per missed filing.
In cases where non-compliance persists even after IRS notification, an additional penalty of up to $50,000 can be imposed.
What if I haven’t been filing US taxes from abroad?
Suppose you’ve been living abroad but you haven’t filed US taxes or reported your foreign financial accounts as required by FATCA (and FBAR). In that scenario, you may be eligible for the Streamlined Filing Compliance Procedures, an amnesty program the IRS offers.
This program is designed for “non-willful” taxpayers who can certify that their failure to file was due to a lack of awareness or a misunderstanding of the rules. The Streamlined Procedure requires filing the most recent three years of delinquent tax returns and other forms such as Form 8938, along with a statement of non-willfulness. In many instances, US taxpayers are able to catch up on their US taxes penalty-free,
Final Thoughts
With the implementation of FATCA, the IRS has gained an effective global tool to monitor Americans’ overseas investments. While we’re not tax advisors at EAFA, we are aware of the different reporting associated with different types of investments, as US expat specialist financial advisors, we seek to minimize any unnecessary reporting or taxes when making investments to help our expat clients’ achieve their financial planning goals. We can also recommend a US expat tax specialist if required.
This article is for informational purposes only; it is not intended to offer advice or guidance on legal, tax, or investment matters. Such advice can be given only with full understanding of a person’s specific situation.
