The FATCA Trap

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By Orlando Gotay

Much has been written about FATCA, the Foreign Asset Tax Compliance Act. Those writings are about banks reporting people to the Treasury. Less talked about: the taxpayer side of the street.

FATCA created a reporting requirement for persons who file tax returns. Form 8938 requires reporting on “Specified Foreign Financial Assets.” Reporting means to “tell,” not necessarily pay tax. So there may or may not be a tax consequence in owning one of these. There are “end of year” and “at any time” values, also depending on filing status. Even more exciting, it also matters if you live inside or outside the US. More on this later.

The list of reportable foreign assets is broad indeed, including financial accounts, stock or securities, interests in foreign entities (remember that Mexican corporation you formed?), and any financial instrument that is issued by a foreign person. Think of mutual funds, AFOREs, equity funds, life insurance with cash value. Notably, real estate held outright is not reportable, but if held through an entity, it might be.

A single person living in the US has a threshold to exceed: US$50,000 at the end of the year or US$75,000 at any time. Living outside the US would change things: US$200,000/US$300,000.

Do you live outside the US? You may have heard of the “physical presence” tests for the Foreign Earned Income Exclusion (330 days) or the “bona fide residence test” (also used to exempt you from Obamacare). If you don’t meet them, guess what—you are considered to be “living” in the US with lower thresholds for this purpose. You may have an inadvertent FATCA form 8938 requirement if you accidentally believe that watching sunsets here makes you automatically qualified for the higher “expat” threshold.

Consider this: Mr. Single has been wintering over but returning “home” every year [tsk, he still lives in the US]. He falls in love with a property and arranges to buy. Ahead of time, he wires US$150,000 into his local Mexican bank to fund the escrow a day later [tsk, he now has a reportable asset, because his account had an amount over the threshold for that one day]. If Mr. Single were considered to be “living outside,” no report would be required due to the higher threshold. Lots of moving parts, traps for the unwary, extreme penalties, and “open forever” statutes of limitations for Form 8938 nonfilers make this awe-inducing. Margaritas, anyone?

Orlando Gotay is a California licensed tax attorney (with a master of laws in taxation) admitted to practice before the IRS, the US Tax Court, and other taxing agencies. His love of things Mexican has led him to devote part of his practice to the federal and state tax matters of US expats in Mexico. He can be reached at tax@orlandogotay.com or Facebook: GotayTaxLawyer. This is just a most general outline and is, of course, informational only and not meant as legal advice.

 

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