After the 2008 financial crisis, the Obama administration passed the HIRE (Hiring Incentives to Restore Employment) Act to stimulate economic growth in the U.S through job creation. To indirectly pay for the act, the FATCA (Foreign Account Compliance Act) was also passed. FATCA’s goal was to increase tax revenue by preventing U.S taxpayers from using foreign assets to avoid paying U.S tax.

Before FATCA, it was common for wealthy Americans to hide assets and income in offshore accounts, especially in places with strong banking secrecy, such as Switzerland and the Cayman Island. The political momentum for FATCA accelerated after the UBS scandal in 2009, which saw UBS, a major bank in Switzerland, secretly assist Americans in tax evasion by setting up undisclosed bank accounts and not reporting these to the IRS.

FATCA has two main mechanisms:

FATCA for U.S. Individuals

If you are a U.S Citizen or green card holder and hold foreign assets, you must file Form 8938 with your annual tax return if your foreign assets exceed:

Filing Status	Living Abroad	Threshold
Single/Unmarried	Yes	$200,000 (year-end), $300,000 (anytime)
Married Filing Jointly	Yes	$400,000 (year-end), $600,000 (anytime)
Living in U.S.	No	$50,000 (year-end), $75,000 (anytime)

Individuals must report all foreign assets, and penalties for not filing include a $10,000 fine, and up to $50,000 for continued failure. Additionally, if the IRS believes you are wilfully hiding assets, criminal penalties can apply.

FATCA for Foreign Financial Institutions (FFIs)

Banks and other financial institutions outside of the U.S are required to identify and report information on U.S account holders to the IRS, as well as sign an agreement with the IRS to share this data annually. If a bank does not comply, they face a 30% withholding penalty on U.S financial transactions. Many foreign banks therefore refuse U.S clients to avoid FATCA headaches.

Many clients confuse the FATCA and the FBAR (Foreign Bank Account Report). The FBAR was passed long before FATCA, as part of the Bank Secrecy Act of 1970, a law requiring financial institutions to assist in detecting and preventing money laundering and other financial crimes. The FBAR requires US citizens and green card holders to report foreign financial accounts if their value exceeds $10,000 in a year. Bank accounts, brokerage accounts, and mutual funds are all things that must be reported. Unlike the FATCA, the FBAR is electronically filed through FinCEN, not with your IRS tax return. Penalties for not filing your FBAR may include $10,000 per accidental violation, and some violations may result in criminal charges.

Summary of Key Differences:

Feature	FBAR (FinCEN 114)	FATCA (Form 8938)
Filed with	FinCEN (Treasury Dept)	IRS (with tax return)
Threshold	$10,000 aggregate in accounts	Starts at $50,000+ (varies)
Includes	Bank, brokerage accounts	Accounts + other assets (stocks, trusts, etc.)
Penalty for failure	$10,000–$100,000+ or criminal charges	$10,000–$50,000+
Applies to	U.S. citizens/residents/entities	U.S. taxpayers (individuals only)

Thankfully, the Foreign Income Earned Exclusion (FEIE) and Foreign Tax Credit (FTC) help reduce tax liability that might arise from income associated with foreign assets. With the FEIE (also known as form 2555), you can withhold up to $130,000 of foreign earned income, if you have lived abroad for 330+ days in a 12-month period, or be a bona fide resident of a foreign country. However, it is important to note that these only applies to earned income, and expats still have an obligation to report under FATCA/FBAR.