What is FATCA?

Definition

The Foreign Account Tax Compliance Act (FATCA) is a US federal law enacted in 2010 as part of the HIRE Act that created a two-pronged reporting regime: it requires US taxpayers to report specified foreign financial assets to the IRS on Form 8938 (Statement of Specified Foreign Financial Assets), and it requires foreign financial institutions (FFIs) worldwide to identify and report information about accounts held by US persons or face a 30% withholding tax on certain US-source payments. Reporting Thresholds for US Taxpayers: FATCA's individual reporting thresholds vary based on filing status and whether you live in the US or abroad. For taxpayers living in the US: single filers must report if foreign assets exceed $50,000 on the last day of the tax year or $75,000 at any time during the year; married filing jointly thresholds are $100,000 (last day) or $150,000 (any time). For taxpayers living abroad: single filers face higher thresholds of $200,000 (last day) or $300,000 (any time); married filing jointly thresholds are $400,000 (last day) or $600,000 (any time). These higher thresholds for expats reflect the reality that US citizens abroad typically hold more foreign assets. Types of Assets Reported Under FATCA: Specified foreign financial assets include bank accounts, brokerage accounts, interests in foreign entities, foreign stock or securities not held in a financial account, foreign partnership interests, foreign mutual funds, foreign-issued life insurance or annuity contracts with cash value, and foreign hedge fund or private equity fund interests. For US-Canada cross-border taxpayers, Canadian RRSPs, TFSAs, RESPs, non-registered investment accounts, and interests in Canadian private corporations all fall within FATCA's scope. Penalties: Failure to file Form 8938 triggers an initial penalty of $10,000. If the IRS sends a notice of failure and the taxpayer does not file within 90 days, an additional $10,000 penalty accrues for each 30-day period (or fraction thereof) of continued non-compliance, up to a maximum of $60,000 in continuation penalties. Beyond direct penalties, failure to file Form 8938 extends the statute of limitations on the entire tax return to six years (instead of the usual three) for any income related to unreported foreign assets. Additionally, a 40% accuracy-related penalty applies to any underpayment attributable to an undisclosed foreign financial asset. FATCA vs. FBAR: FATCA (Form 8938) and FBAR (FinCEN Form 114) are separate reporting obligations that overlap but differ in critical ways. FATCA is filed with the IRS as an attachment to your tax return; FBAR is filed electronically with FinCEN. FATCA covers a broader range of assets (including foreign stock certificates and partnership interests not in a financial account) but has higher reporting thresholds. FBAR covers only financial accounts but has a much lower $10,000 aggregate threshold. Most US-Canada cross-border taxpayers with significant Canadian holdings must file both. FATCA's Impact on Foreign Financial Institutions: Under intergovernmental agreements (IGAs), Canadian banks and financial institutions report US-account-holder information to the CRA, which then shares it with the IRS. This means the IRS already knows about your Canadian accounts — failing to report them on Form 8938 while your Canadian bank reports them creates an automatic mismatch that triggers IRS scrutiny. Canada signed its FATCA IGA with the US in 2014. Cross-Border Planning: For US citizens in Canada, FATCA reporting intersects with PFIC rules (if you hold Canadian mutual funds), foreign trust reporting (if you hold certain registered plans), and CFC rules (if you own a Canadian corporation). A comprehensive cross-border tax strategy should address all overlapping obligations simultaneously.

Related Forms

Common Mistakes to Avoid

• 1Confusing FATCA Form 8938 with FBAR FinCEN 114 — they have different thresholds, different filing destinations, and different asset coverage
• 2Not realizing that Canadian banks already report your accounts to the IRS via the Canada-US IGA, making non-filing easily detectable
• 3Failing to report Canadian pension plans (RRSPs, TFSAs) as specified foreign financial assets

Related Terms