The Foreign Account Tax Compliance Act (FATCA) was signed by President Obama in March 2010 as a revenue provision to the Hiring Incentives to Restore Employment Act. Its implementation has been pushed back several times while administrators tried to get it structured in an enforceable manner.
More Paperwork and Reporting for Tax Season
For Americans with specified foreign financial assets, things are about to get a lot more complicated when filing their taxes. Everyone must indicate on their IRS filings if they have foreign financial assets (or even signatory control over these assets, which may come from their job) and they must also inform the Department of Treasury of the same—but separately, as they are two different entities.
FATCA is intended to ensure that the IRS and Department of Treasury obtain information on accounts held in Foreign Financial Institutions (FFIs) by U.S. citizens—affecting U.S. citizens living in and out of the U.S. with specified foreign financial assets per the following totals:
||Living Within United States
||Living outside of the United States
|Single OR Married Filing Separately
||>$50,000 USD on last tax day or a high balance of >$75,000 USD during tax year
||>$200,000 USD on last tax day or a high balance of >$300,000 USD during the tax year
||>$100,000 USD on last tax day or a high balance of >$150,000 USD during tax year
||>$400,000 USD on last tax day or a high balance of >$600,000 USD during the tax year
The IRS defines a taxpayer living outside of the United States as a U.S. citizen whose tax home is in a foreign country and who is either a bona fide resident of a foreign country or countries for an uninterrupted period that includes the entire tax year, or a U.S. citizen or resident, who during a period of 12 consecutive months ending in the tax year is physically present in a foreign country or countries at least 330 days.
Heavy Penalties for Non-Compliance
If the above conditions are met, the individual must complete IRS Form 8938. Failure to report foreign financial assets accordingly will result in a penalty of $10,000 (and up to $50,000 in penalties for continued failure after IRS notification)!
However, it has been difficult to get FFIs to comply with reporting to help the IRS match to what the U.S. taxpayers are reporting, so the deadline for the FFI reporting has been extended to register by July 2014 with the first reports to reach the IRS by March 31, 2015 regarding accounts maintained during 2014.
Regardless of the extension for FFIs to get on board, the IRS contends that most taxpayers should have started filing Form 8938 with their 2011 income tax return.
“If there are people who have missed the FBAR or Form 8938 disclosures,” says Carol-Ann Simon of Perkins & Co., “there are various IRS disclosure programs available that they should explore in order to minimize or even eliminate potential penalties for being in noncompliance.”
The following table illustrates the types of assets that are and are not reportable under FATCA:
|Types of Foreign Assets Requiring Form
||Asset Types NOT Reportable Under FATCA
|Financial (deposit and custodial) accounts held at foreign financial institutions
||Domestic mutual fund investing in foreign stocks and securities
|Foreign stock or securities not held in a financial account
||Indirect interests in foreign financial assets through an entity
|Foreign partnership interests
||Foreign real estate held directly
|Foreign mutual funds
||Foreign currency and Precious Metals held directly
|Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust for which you are the grantor
||Personal property, held directly, such as art, antiques, jewelry, cars and other collectibles
|Foreign-issued life insurance or annuity contract with a cash value
||Social Security-type program benefits provided by a foreign government
As the Department of Treasury stepped in to assist by making reciprocal agreements with governments of various countries, the tide began to turn because tax avoidance has become a global issue and countries are looking for ways to tighten their revenue nets.
This allowed the deadlines to stop being pushed back as it assisted the IRS in obtaining agreements with FFIs. FATCA has developed into an opportunity to develop financial information sharing between countries.
Participating FFIs will be obligated to:
1. Undertake certain identification and due diligence procedures with respect to its accountholders,
2. Report annually to the IRS on its accountholders who are U.S. persons or foreign entities with substantial U.S. ownership, and
3. Withhold and pay over to the IRS 30 percent of any payments of U.S. source income, as well as gross proceeds from the sale of securities that generate U.S. source income, made to:
a. Non-participating FFIs,
b. Individual accountholders failing to provide sufficient information to determine whether or not they are a U.S. person, and
c. Foreign entity accountholders failing to provide sufficient information about the identity of its substantial U.S. owners.
Global Challenges Attributed to FATCA
- Some FFIs are refusing to accept American clients because of the compliance burden
- Compliance burden is driving up operation expenses at financial institutions
- Banking institutions claim that many foreign nationals have pulled money from their banks
- Increase in number of Americans renouncing their citizenship
- Opposition to FATCA is growing within the U.S. Congress; bill was introduced to appeal it
- U.S. Treasury subject of a lawsuit claiming that FATCA breaks laws in public administration and financial regulation
- Convincing grounds to suggest that the Treasury is overstepping its authority with the way it is implementing FATCA—original legislation does not allow the Treasury to negotiate agreements with foreign governments, let alone reciprocity
“I am seeing all of these issues in my practice,” says Carol-Ann Simon of Perkins & Co. “There is a lot of difficulty, in practice, in getting the data from foreign sources, when many foreign institutions do not have the same level of reporting or frequency of reporting that we may see in the United States. The extra time burden in gathering all of this data is very real.”
Until something drastic occurs, FATCA is the new reality, requiring increased compliance.
Furthermore, it is critical to partner with global tax providers who are experienced and knowledgeable with taxing practices throughout the world. Helping your employees understand the importance of FACTA regulations and compliance can help alleviate frustration and minimize personal financial risk.
The above information is being provided based on available resources at the time of distribution. The information is general in nature and is being presented as an overview. It should not be viewed as tax, legal or other advice as to a specific program or consequences arising from a particular situation.