The Foreign Account Tax Compliance Act (FATCA) adds another layer of complexity to the already challenging financial situations faced by U.S. expatriates. Many expats hold accounts in foreign financial institutions (FFIs), which may fall under FATCA’s reporting requirements. FATCA requires FFIs to share account data of U.S. taxpayers, either through intergovernmental agreements or directly under FATCA law.
Withholding Requirements Under FATCA
If an FFI does not comply with FATCA, any U.S.-sourced payments sent to that institution may be subject to a 30% withholding rate. This rule was intended to prevent tax evasion but had broader consequences. Many FFIs responded by refusing to accept U.S. account holders, leaving many expatriates unable to open or maintain accounts overseas.
This impact extends to retirees and expats receiving income from U.S. sources such as pensions or Social Security payments. If these payments are directed to a non-compliant FFI, they may face automatic withholding. Even basic wire transfers from a U.S. bank account to a foreign bank account could be affected.
Reporting Interest and Income from FFIs
Expats are also required to declare interest earned in foreign accounts. Although not directly covered by FATCA, this must be reported on Form 8938 and included on the tax return. If interest or dividends exceed $1,500 per year, expats must also file Form FinCEN 114 (FBAR). FFIs themselves are not always responsible for this reporting, so the burden falls on the taxpayer.
Given the IRS’s scrutiny of offshore accounts, many expect FATCA requirements to expand further. For example, FFIs may eventually be required to provide annual accounting to the IRS or local tax authorities. This would effectively position foreign banks as tax agents for the IRS whenever U.S. taxpayers are account holders.
Staying Compliant with FATCA
The broad scope of FATCA means that expatriates must remain vigilant with both reporting and withholding obligations. Failure to comply can result in penalties, difficulties opening foreign accounts, and unexpected withholding on U.S. payments.
At 1099FIRE, we provide the tools and support you need to stay compliant with FATCA requirements:
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Form 1042-S software for reporting U.S.-sourced payments to foreign persons
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Form 1042 software for annual withholding reporting
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Electronic filing services to ensure fast and accurate submission to the IRS
Need help managing FATCA compliance for expatriates or foreign accounts? Contact 1099FIRE today to get expert assistance.