FATCA Compliance: How Digital Nomads and American Expatriates may stay tax compliant in the United States
Introduction
The Foreign Account Tax Compliance Act (FATCA) is a landmark U.S. law aimed at preventing tax evasion by U.S. taxpayers holding assets abroad. Since its enactment in 2010, FATCA has had far-reaching implications for both international businesses and individuals, including digital nomads and American expatriates. Here, we provide an overview of FATCA requirements, compliance obligations, and the potential penalties for non-compliance.
What is FACTA?
FATCA mandates that foreign financial institutions (FFIs) and certain non-financial foreign entities (NFFEs) disclose information about U.S. account holders to the IRS. This legislation ensures that U.S. taxpayers cannot hide income and assets in foreign accounts to evade taxes.
FATCA Requirements for Non-Financial Foreign Entities (NFFEs)
Disclosure of Substantial U.S. Owners
NFFEs must disclose information about substantial U.S. owners (generally those owning more than 10% of the entity) to avoid FATCA withholding on certain payments. This information is typically provided using Form W-8BEN-E.
Withholding Requirements
NFFEs that fail to comply with FATCA disclosure requirements may be subject to a 30% withholding tax on U.S. source payments, including interest, dividends, rents, and other income.
Implications for Digital Nomads and American Expatriates
Digital nomads and American expatriates with foreign financial accounts must be aware of FATCA's reporting requirements. If you are a U.S. taxpayer living abroad, you must report your foreign financial assets using Form 8938 (Statement of Specified Foreign Financial Assets) if the total value exceeds certain thresholds.
Additionally, the FBAR (FinCEN Form 114) must be filed if the aggregate value of your foreign accounts exceeds $10,000 at any time during the year.
Compliance and Penalties
Penalties for Individuals
- Failure to File Form 8938: An initial penalty of $10,000, with continuing penalties up to $50,000 for prolonged non-compliance.
- Accuracy-Related Penalties: 20% of the underpayment of tax attributable to non-disclosed foreign financial assets.
- Criminal Penalties: Potential fines and imprisonment for willful failure to file or tax evasion.
- Withholding Tax: A 30% withholding tax on certain U.S. source payments for non-compliant FFIs and NFFEs.
- Reporting Penalties: Termination of FATCA agreement with the IRS and additional fines for FFIs that fail to report required information.
FATCA Compliance
Ensuring FATCA compliance can be complex and challenging. Both individuals and businesses should seek professional advice to navigate the intricacies of FATCA. This is particularly important for digital nomads and American expatriates who may have multiple foreign accounts and complex financial situations.
Conclusion
FATCA has transformed the landscape of international tax compliance, compelling both businesses and individuals to disclose foreign financial assets and accounts. For FFIs and NFFEs, this means rigorous reporting and withholding obligations. For digital nomads and American expatriates, it means diligent reporting of foreign financial assets to avoid severe penalties.
Staying compliant with FATCA is essential to avoid hefty fines and potential criminal charges. Consulting with an international corporate law firm or a tax professional can help ensure you meet all FATCA requirements and maintain good standing with the IRS.
Della Torre Law, PLLC