Moving and living abroad can result in complicated situations—especially where finances are concerned. For the estimated 335,000 expat U.S. citizens who earn an income overseas, it can be even more complicated than for other nationalities, since the United States is the only country that requires its citizens to file overseas income taxes on peril of losing citizenship.
The Foreign Account Tax Compliance Act
In 2010, the Foreign Account Tax Compliance Act (FACTA) was created in order to flush out tax evaders who failed to declare overseas income or capital. According to the IRS, U.S. taxpayers who have signature authority or a financial interest over one or more overseas bank accounts must use Form 8938 to report these assets, and it should be attached to their annual income tax return (typically Form 1040). If the total value is below $50,000 at the end of the tax year, the taxpayer doesn’t have to report the income unless the value exceeded $75,000 at any time during the year. The threshold is higher in some cases and is different for married and single taxpayers.
In addition to Form 8938, any United States taxpayer with financial interest or signature authority over at least one overseas financial account must file an FBAR form if the aggregate value of said accounts exceeds $10,000. It’s important to realize that the FACTA regulations also apply to U.S. expats who return to their homeland, but who still hold overseas bank or financial accounts. However taxpayers who aren’t required to file an income tax return for the tax year also aren’t required to complete Form 8938.
Additionally, the FACTA reporting obligation also affects taxpaying expats from other countries who are living in the United States. Many immigrants have bank accounts in their homeland, even if they don’t use them after moving to the U.S. As of this year, they need to review their accounts and determine whether they need to be reported.
Penalties for not complying with the FACTA regulations are severe. The penalty for failure to file Form 8938 is up to $10,000 for failure to disclose, plus an additional $10,000 for each 30 days of non-filing after the taxpayer receives the IRS notice of failure to disclose (max. $60,000). In some cases the IRS may impose criminal penalties as well. For non-willful failure to file FBAR, the penalty is up to $10,000. If willful, the penalty is up to $100,000 or 50%, whichever is greater, and criminal penalties can also apply.
What makes this so relevant now is that as of this year, the IRS has more stringent methods to enforce these regulations. It has formed alliances with over 100 countries, establishing a requirement for financial institutions in those countries to report any accounts belonging to U.S. citizens, U.S green card holders and U.S. expats.
And that brings us to the other aspect of this situation that makes life for U.S. expats difficult. If a bank fails to report even one single person, the U.S. Department of Treasury could fine the institution as much as 30 percent of its U.S. income. This means that U.S. citizens are high-risk customers, and many banks and other financial institutions around the world are reluctant or unwilling to work with them.
Corporate Relocation Companies Can Help
Fortunately, experienced corporate relocation companies like CapRelo can be of assistance to U.S. expats moving and living abroad. Corporate relocation companies often have a network of banks, lenders and other financial institutions that possess the infrastructure and knowledge to work with U.S. customers. In addition, they can assist in finding international tax specialists who can help ensure expats meet all of their tax reporting obligations.
In conclusion, FACTA certainly makes financial matters more complicated for those living abroad. But by being aware of the reporting requirement and knowing how to find the right kind of help, expats can still have a valuable, enjoyable overseas experience.
Although this written communication may address tax issues, it is not a covered opinion as described in Circular 230. Therefore, to ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments), unless expressly stated otherwise, was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.