U.S. tax legislation is primarily contained within the Internal Revenue Code, which consists of tens of thousands of sections. For those outside the fields of accounting and tax consulting, keeping up with the numerous rules, regulations, and reporting requirements can be overwhelming. While mastering all tax laws is impractical for non-professionals, one law that is particularly important to understand is FATCA—the Foreign Account Tax Compliance Act.
This article explains the origins of FATCA, outlines its key reporting obligations, and examines its relevance to individuals with U.S. tax obligations, particularly Israeli citizens with dual U.S. citizenship.
What Is FATCA?
The Foreign Account Tax Compliance Act (FATCA) is a U.S. federal law with broad implications both domestically and internationally. Enacted in 2010, FATCA was designed to improve tax enforcement by requiring greater financial disclosure from U.S. taxpayers and foreign financial institutions. The law came into effect in 2013, introducing three main reporting obligations:
- Individuals filing U.S. tax returns must report foreign financial assets exceeding certain thresholds using Form 8938 (Statement of Specified Foreign Financial Assets).
- U.S. citizens and residents must file an FBAR (Foreign Bank Account Report) if their total foreign account balances exceed $10,000 at any time during the year.
- Foreign financial institutions must report accounts held by U.S. persons or face significant penalties.
Now, let’s examine each of these obligations in more detail.
1. Reporting Foreign Financial Assets – Form 8938
FATCA was introduced to combat tax evasion and reduce the U.S. budget deficit by improving tax compliance. One of its key provisions is the requirement for U.S. taxpayers to report foreign financial assets as part of their annual tax return.
Who must file Form 8938?
A taxpayer must file Form 8938 if they:
- Are a U.S. citizen, a permanent resident (under certain conditions), or a U.S. entity that is majority-owned by U.S. persons.
- Hold foreign financial assets above the reporting threshold:
- For U.S. residents: $50,000 at year-end or $75,000 at any time during the year.
- For U.S. taxpayers living abroad: $200,000 at year-end or $300,000 at any time during the year.
What must be reported?
- Foreign bank accounts
- Stocks, bonds, and mutual funds held outside the U.S.
- Foreign financial instruments
- Pension funds, life insurance policies with cash value, and certain other financial accounts
Important Notes:
- Filing Form 8938 does not replace FBAR reporting (explained next); some individuals may need to file both.
- Failure to report foreign assets can result in severe penalties, including fines of up to $50,000.
2. Reporting Foreign Accounts – FBAR (FinCEN Form 114)
In addition to FATCA, U.S. citizens, permanent residents, and entities may also be required to report their foreign accounts under the Bank Secrecy Act (BSA) by filing an FBAR (Foreign Bank Account Report) with the U.S. Treasury.
Who must file an FBAR?
A person or entity must file an FBAR (FinCEN Form 114) if they:
- Are a U.S. citizen, permanent resident, or U.S. corporation.
- Have an interest in one or more foreign financial accounts.
- Have a total foreign account balance exceeding $10,000 at any time during the year.
What types of accounts must be reported?
- Checking, savings, and investment accounts
- Pension and retirement funds
- Life insurance policies with cash value
- Joint accounts where the filer has signature authority
Key Differences Between FBAR and Form 8938:
- FBAR is filed separately with the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN), not with the IRS.
- FBAR applies at a lower threshold ($10,000) and does not require tax return filing.
- Failure to file an FBAR can result in significant penalties, including fines of up to $100,000 or 50% of the account balance per violation.
3. Reporting by Foreign Financial Institutions
Perhaps the most far-reaching aspect of FATCA is its impact on foreign financial institutions (FFIs), including banks, insurance companies, and investment funds.
What are FFIs required to do?
- Identify accounts held by U.S. citizens, green card holders, and certain U.S. entities.
- Report these accounts to the IRS or their local tax authority.
- Withhold 30% of certain U.S.-sourced payments for non-compliant account holders.
Since the U.S. has signed tax information exchange agreements with many countries, including Israel, Israeli banks actively monitor accounts for U.S. tax obligations. If an account is flagged as belonging to a U.S. person, the bank may require the account holder to sign a declaration of tax compliance. Failure to do so may result in account restrictions or withholding taxes.
Summary of FATCA and FBAR Requirements
| Requirement | Form 8938 (FATCA) | FBAR (FinCEN 114) | Foreign Bank Reporting |
| Who must file? | U.S. taxpayers meeting asset thresholds | U.S. taxpayers with foreign accounts over $10,000 | Foreign financial institutions (via local tax authority) |
| Reporting threshold | $200,000 (expats), $50,000 (U.S. residents) | $10,000 (cumulative) | No minimum |
| What is reported? | Financial assets (stocks, bonds, funds, accounts) | Foreign bank and financial accounts | Accounts held by U.S. citizens |
| Filed with? | IRS (as part of tax return) | FinCEN (separately from tax return) | IRS or local tax authority |
| Deadline | April 15 (with extension to October 15) | April 15 (with extension to October 15) | Ongoing |
Need Help with FATCA Compliance?
Navigating FATCA and FBAR requirements can be complex. If you are unsure about your obligations or need assistance filing the required forms, MasAmerica’s team of US tax advisors in Israel is here to help.
Our experts, fluent in English and Hebrew, include U.S.-licensed attorneys and accountants specializing in tax compliance.
Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Please consult a qualified professional before taking any action.
