Author: James Reilly.
Overview. The Foreign Account Tax Compliance Act (FATCA), enacted by the U.S. government in 2010, is part of the U.S. efforts to combat tax evasion by U.S. taxpayers holding investments in offshore accounts. FATCA is not a tax, but rather a reporting obligation. Its purpose is to require U.S. taxpayers holding assets in foreign corporations to report that ownership. Under FATCA, U.S. taxpayers holding company shares outside the United States must report those assets to the Internal Revenue Service (IRS). In addition, FATCA will require foreign financial institutions to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. With the enactment of the Registry of Transparency and Final Beneficiaries law in Costa Rica, the Costa Rican government will know for the first time who are the U.S.shareholders of all Costa Rican corporations and will report that information to the IRS.
Who needs to file?
U.S. Taxpayers living abroad. You must file a Form 8938 if:
- You are married filing a joint income tax return and the total value of your specified foreign financial assets is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.
- You are not a married person filing a joint income tax return and the total value of your specified foreign financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year.
U.S. Taxpayers living in the United States. You must file Form 8938 if:
- You are unmarried and the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year
- You are married filing a joint income tax return and the total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year. You are married filing separate income tax returns and the total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
Asset Valuation. You will need to determine the value of your specified foreign financial assets to know if the total value exceeds the threshold applicable to you. The IRS requires: a reasonable estimate of the highest fair market value of the asset during the tax year is reported. You may determine the fair market value of a specified foreign financial asset based on information publicly available from reliable financial information sources or from other verifiable sources. Even if there is no information from reliable financial information sources regarding the fair market value of a reported asset, a reasonable estimate of the fair market value will be sufficient for reporting purposes.
Penalties for Failure to Report. Failure to report foreign financial assets on Form 8938 will result in a penalty of $10,000 (and a penalty up to $50,000 for continued failure after IRS notification). Underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40 percent.
Costa Rica Intergovernmental Agreement. The United States and Costa Rica have entered into the Model 1A Intergovernmental Agreement. Under Model 1, Foreign Financial Institutions report information about U.S. Taxpayers accounts to the tax authority of the partner country. In the case of Costa Rica that entity is the Ministerio de Hacienda. The Ministerio de Hacienda then provides the information to the IRS. The information provided includes:
- Account holders name.
- S. Taxpayer Identification Number.
- Account holders address.
- Account balance and highest balance during the year.
- Names of any U.S. holders of non-financial foreign entity shares.