FATCA and Foreign Financial Accounts: Compliance Guide for Arab Americans

FATCA Compliance: What Arab Americans Must Know

If you're a U.S. citizen or resident with financial assets abroad, FATCA (Foreign Account Tax Compliance Act) imposes significant reporting obligations. Failure to comply can result in penalties of $10,000 to $50,000+ per year. This comprehensive guide explains FATCA requirements and how to stay compliant.

What Is FATCA?

FATCA is a 2010 U.S. law designed to combat offshore tax evasion. It requires:

1. U.S. Taxpayers to Report Foreign Financial Assets

Via Form 8938 filed with your tax return.

2. Foreign Financial Institutions to Report U.S. Account Holders

Banks worldwide now report U.S. citizens' accounts directly to the IRS.

Why This Matters:

The IRS now has direct access to information about your foreign accounts from foreign banks. Failure to report is no longer just overlooked - it's easily detected.

Who Must Comply with FATCA?

"U.S. Persons" subject to FATCA include:

• U.S. citizens (regardless of where you live)
• U.S. permanent residents (green card holders)
• Anyone meeting the substantial presence test (physically present in U.S. for sufficient time)

Living abroad doesn't exempt you. Even if you live in Lebanon, Jordan, or Egypt full-time, if you're a U.S. citizen or green card holder, you must comply.

Specified Persons (must file Form 8938 if assets exceed thresholds):

• Individuals
• Some trusts and estates

Specified Domestic Entities (certain closely-held corporations and partnerships formed or used to hold foreign assets).

Form 8938: Statement of Specified Foreign Financial Assets

What Is Form 8938?

An annual form filed with your tax return reporting foreign financial assets if they exceed certain thresholds.

Different from FBAR (FinCEN Form 114):

Both forms report foreign accounts, but have different thresholds, deadlines, and reporting requirements. You may need to file both.

Form 8938 Filing Thresholds

Whether you must file depends on your filing status and where you live:

Living in the United States:

Single or Married Filing Separately:

• File if total value of foreign assets exceeds $50,000 on last day of tax year
• OR exceeds $75,000 at any time during the year

Married Filing Jointly:

• File if total value exceeds $100,000 on last day of tax year
• OR exceeds $150,000 at any time during the year

Living Outside the United States:

Single or Married Filing Separately:

• File if total value exceeds $200,000 on last day of tax year
• OR exceeds $300,000 at any time during the year

Married Filing Jointly:

• File if total value exceeds $400,000 on last day of tax year
• OR exceeds $600,000 at any time during the year

Important: These are aggregate totals. Add up ALL specified foreign financial assets to determine if you exceed the threshold.

What Assets Must Be Reported on Form 8938?

Specified Foreign Financial Assets include:

Financial Accounts:

• Bank accounts (checking, savings)
• Time deposits, certificates of deposit
• Foreign retirement and pension accounts
• Foreign mutual funds
• Foreign hedge funds
• Foreign private equity funds
• Any other foreign financial account

Other Foreign Financial Assets:

• Stocks or securities issued by non-U.S. corporations
• Bonds issued by foreign entities
• Interest in a foreign partnership
• Interest in a foreign trust
• Swap, option, or other derivative contracts with non-U.S. counterparties
• Any financial instrument or contract held for investment with a non-U.S. issuer or counterparty

Assets NOT Reported on Form 8938:

• Foreign real estate held directly (report rental income, but not the property itself on Form 8938)
• Foreign business interests (unless held through a financial account or trust)
• Personal property (vehicles, jewelry, art, etc.)
• Social Security-equivalent benefits from foreign governments

However: If you own foreign real estate through a foreign corporation or entity, you may need to report your interest in that entity.

How to Value Foreign Assets

Maximum Value:

Report the highest value during the tax year. Check account balances at regular intervals and note the maximum.

Currency Conversion:

Convert foreign currency to U.S. dollars using the Treasury Department's Bureau of the Fiscal Service exchange rate for the last day of the tax year. Find rates at fiscal.treasury.gov/reports-statements/treasury-reporting-rates-exchange.

Example:

• Lebanese bank account
• Highest balance during year: 150,000,000 LBP
• Exchange rate on Dec 31: 89,500 LBP = $1 USD
• Report: $1,676 USD

Jointly Owned Assets:

If you own an account jointly with a non-spouse, report only your share of the maximum value. If jointly with spouse filing jointly, each spouse may report the entire value, or one spouse can report the entire value (include a statement explaining).

Form 8938 vs. FBAR: Understanding the Differences

Many Arab Americans must file BOTH forms. Here's how they differ:

Form 8938 (FATCA):

• Filed with your Form 1040 tax return
• Deadline: April 15 (or October 15 if on extension)
• Thresholds: $50,000-$600,000 depending on filing status and residence
• Includes foreign financial accounts AND other foreign assets
• Penalties: $10,000+ per violation

FBAR (FinCEN Form 114):

• Filed separately at fincen.gov (NOT with your tax return)
• Deadline: April 15 (automatic extension to October 15)
• Threshold: $10,000 aggregate at any time during year
• Only foreign financial accounts (not other assets)
• Penalties: $10,000-$100,000+ per violation, possible criminal charges

Key Difference:

FBAR has a much lower threshold ($10,000 vs. $50,000+), so many people must file FBAR but not Form 8938.

Example:

• You have $25,000 in a Lebanese bank account
• You must file FBAR (exceeds $10,000)
• You do NOT file Form 8938 if living in U.S. and single (doesn't exceed $50,000)

Common for Arab Americans:

Many people with accounts in Lebanon, Jordan, Egypt, or Gulf countries must file FBAR every year but only file Form 8938 if assets exceed the higher thresholds.

Step-by-Step: How to Complete Form 8938

Part I: Type of Filer

Indicate whether you're filing as an individual, specified person, or specified domestic entity.

Part II: Assets Reported

Summarize the types of assets being reported:

• Deposit and custodial accounts
• Other financial accounts
• Other foreign assets

Part III: Detailed Information

For each asset, provide:

• Description of asset
• Identifying number (account number, CUSIP, etc.)
• Name and address of financial institution or issuer
• Maximum value during year
• Currency
• Exchange rate used
• Value in U.S. dollars

Part IV: Excepted Foreign Financial Assets

List any assets that would otherwise be reportable but are excepted (rare for individuals).

Part V: Additional Information

Attach statements if you need more space or have complex situations.

Sign and Date:

Sign under penalty of perjury.

Attach to Your Form 1040:

File Form 8938 with your tax return, even if filing electronically.

Penalties for Non-Compliance

Failure to File Form 8938:

Civil Penalties:

• $10,000 for failure to file
• Additional $10,000 for each 30 days of continued failure after IRS notice (up to $50,000 maximum)
• 40% penalty on any understatement of tax related to non-disclosed foreign assets

Example:

• You don't file Form 8938
• You also don't report income from the foreign account
• Underpayment of tax: $15,000
• Penalty: $15,000 × 40% = $6,000
• Plus $10,000-$50,000 for failure to file Form 8938
• Total penalties: $16,000-$56,000

Criminal Penalties:

• Willful failure to file can result in criminal prosecution
• Fines up to $250,000
• Prison time up to 5 years

Reasonable Cause Exception:

Penalties can be waived if you can show your failure was due to reasonable cause and not willful neglect. Consult a tax attorney if you qualify for this exception.

What If You Haven't Been Filing?

If you have unreported foreign accounts and haven't been filing FBARs or Forms 8938, you have options:

1. Streamlined Filing Compliance Procedures

For non-willful failures (you didn't intentionally evade taxes):

Foreign Residents:

• File 3 years of amended tax returns
• File 6 years of FBARs
• Certify non-willfulness
• No penalties

U.S. Residents:

• File 3 years of amended returns
• File 6 years of FBARs
• Certify non-willfulness
• 5% penalty on highest account balance (minimal compared to standard penalties)

2. Delinquent FBAR Procedures

If you have no unreported income, just file the missing FBARs with an explanation. No penalties if truly no income was unreported.

3. Delinquent International Information Return Procedures

If you failed to file certain international forms but have no unreported income, file them late with an explanation.

4. Voluntary Disclosure

If your violation was willful, voluntary disclosure may reduce penalties and avoid criminal prosecution, but penalties will still be significant.

DO NOT:

• Ignore the problem - the IRS knows about your accounts through FATCA
• Make a "quiet disclosure" by just filing now without following a formal program
• Lie or hide assets when the IRS contacts you

Get professional help immediately if you have unfiled returns or unreported accounts.

Common FATCA Scenarios for Arab Americans

Scenario 1: Bank Account in Home Country

• You maintain a checking account in Lebanon for family or property management
• Balance: $30,000
• Must file: FBAR (yes, exceeds $10,000), Form 8938 (no, unless living abroad or have other assets pushing you over threshold)

Scenario 2: Inherited Family Home

• You inherited a house in Jordan worth $200,000
• Held in your name directly
• Must file: Form 8938 (no, real estate held directly is not a specified asset), but you must report rental income if rented

Scenario 3: Family Home Owned Through Corporation

• You own 50% of a Jordanian corporation that owns family home
• Fair market value of your shares: $100,000
• Must file: Form 8938 (yes, if exceeds thresholds), Form 5471 (ownership in foreign corporation)

Scenario 4: Multiple Small Accounts

• Account 1 (Lebanon): $6,000
• Account 2 (Egypt): $5,000
• Account 3 (UAE): $4,000
• Total: $15,000
• Must file: FBAR (yes, aggregate exceeds $10,000), Form 8938 (no, unless other assets or exceed higher thresholds)

Scenario 5: Foreign Retirement Account

• Pension in Gulf country: $75,000
• Must file: Depends on type of account and whether you must make contributions. Consult a tax attorney - foreign pension reporting is complex.

Scenario 6: Business Accounts Abroad

• You own a business in Egypt with bank accounts totaling $200,000
• Must file: FBAR, Form 8938 (if individually owned accounts exceed thresholds), Form 5471 or 8865 (depending on business structure)

Foreign Real Estate: Special Considerations

Direct Ownership:

If you own foreign real estate in your name:

• NOT reported on Form 8938 or FBAR
• But rental income must be reported on Schedule E
• Capital gains on sale reported on Form 8949/Schedule D

Held Through Foreign Entity:

If property is owned by a foreign corporation, trust, or partnership:

• Your interest in the ENTITY may be reportable on Form 8938
• Additional forms required (5471, 3520, 3520-A, 8865 depending on structure)
• This is a complex area requiring professional guidance

Foreign Mortgages:

You can't deduct interest on a mortgage for a foreign property on your U.S. tax return (unlike U.S. mortgages).

Foreign Business Interests

If you own or have an interest in a business abroad:

Form 5471 (Ownership in Foreign Corporation):

• Required if you own 10%+ of a foreign corporation
• Or meet other ownership tests
• Severe penalties for failure to file ($10,000-$50,000+)

Form 8865 (Ownership in Foreign Partnership):

• Required for certain levels of ownership or control
• Similar penalties to Form 5471

Form 3520/3520-A (Foreign Trusts):

• Required if you're a beneficiary, grantor, or transferor of a foreign trust
• Or receive distributions from foreign trusts
• Penalties: 35% of amounts involved

These forms are in addition to FBAR and Form 8938.

Compliance Checklist for Arab Americans with Foreign Assets

☐ Determine all foreign financial accounts and assets

• Bank accounts
• Investment accounts
• Business interests
• Pension/retirement accounts
• Trusts
• Entity ownership

☐ Calculate maximum values during the year

• Check balances monthly
• Use correct exchange rates

☐ Determine which forms you must file:

• FBAR (FinCEN Form 114)
• Form 8938 (FATCA)
• Form 5471 (foreign corporations)
• Form 8865 (foreign partnerships)
• Form 3520/3520-A (foreign trusts)
• Form 8621 (PFIC - foreign mutual funds)

☐ Gather account documentation:

• Year-end statements
• Monthly statements showing maximum balances
• Entity formation documents
• Trust documents
• Business financial statements

☐ File FBAR by April 15 (automatic extension to October 15)

☐ File Form 8938 with your tax return

☐ Report all foreign income:

• Interest and dividends
• Rental income from foreign property
• Business income
• Capital gains
• Pension distributions

☐ Consider streamlined procedures if non-compliant:

• Consult a tax attorney before filing

☐ Stay compliant going forward:

• Set annual reminders
• Keep good records
• Work with a tax professional familiar with international tax

Why Arabic-Speaking Tax Help Is Essential

FATCA and international tax compliance involves:

• Complex forms with severe penalties
• Understanding foreign financial systems
• Valuing foreign assets accurately
• Currency conversions
• Interpreting foreign documents
• Navigating IRS procedures

An Arabic-speaking tax attorney provides:

• Clear explanations in Arabic of your obligations
• Help understanding foreign documents
• Guidance on complex entity structures
• Assistance with streamlined procedures if needed
• Communication with foreign banks and advisors
• Representation if IRS audits your foreign accounts
• Peace of mind that you're fully compliant

Cost of non-compliance far exceeds the cost of professional help.

Get Compliant with FATCA Today

If you have foreign financial accounts or assets, don't risk severe penalties and criminal prosecution. The IRS has unprecedented access to foreign account information through FATCA - non-compliance will be discovered.

Our network of Arabic-speaking tax attorneys specializes in international tax compliance for Arab Americans. We've helped thousands of clients:

• Navigate FATCA requirements
• Come into compliance through streamlined procedures
• Properly report complex foreign holdings
• Avoid or minimize penalties
• Gain peace of mind

Contact us today for a free confidential consultation. We'll review your situation, explain your obligations in Arabic, and create a compliance plan. Don't wait until the IRS contacts you - that's too late to take advantage of penalty relief programs.