FATCA Regulations (Foreign Account Tax Compliance Act)
The Foreign Account Tax Compliance Act (FATCA), was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. It is one of the most important developments in years in U.S. efforts to combat tax evasion by U.S. persons holding investments in offshore accounts.
Essentially american expats living abroad who thought the IRS would never be able to find or track their offshore holdings will have cause to rethink this. With penalties that include severe fines or even jail time, citizens will have to consider that the new law makes it much more likely that their holdings will be discovered and reported to the IRS by the very same foreign banks that were formerly “sheltering” your money.
FATCA is in many ways, a brillliant move by the IRS. With this law, the IRS has essentially deputized foreign banks to do the work of enforcement and detection of US taxpayers hiding assets in offshore accounts. The way it works is that FATCA agreements are first worked out between the IRS and various countries. Currently this includes most European and many South American countries with more agreements being ratified every month. Under FATCA these foreign banks are now required to report to the U.S. Internal Revenue Service (IRS) starting January 1st, 2014, a list of all their clients who are U.S. citizens. In order to do this the bank requests all their U.S clients to complete a standard W-9 form which identifies the US expat for tax purposes. This information is then provided to the IRS. If you are a US expat you should know that refusing to complete this form can result in your bank actually freezing your accounts.
You may find yourself asking How can the IRS get away with this? Simple. According to U.S. law, all U.S. citizens have an obligation to pay taxes on all their worldwide income including any foreign income. In addition, in cases where the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year they also have to fill out Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (otherwise known as “FBAR”). This requirement applies to any financial interest including even signature authority over any foreign financial account, such as a bank account, brokerage account, mutual fund, trust, pension plan, etc.
The FBAR form must be received by the Department of Treasury in Detroit, on or before June 30th of the year following the calendar year being reported. No extensions are allowed.
So, if you are a U.S. citizen, and you never filed U.S. tax returns, not to mention the FBAR form, AND the bank requests that you sign on form W9, you are in trouble, since not complying with your tax or FBAR duty could be considered a felony in addition to being subject to civil litigation by the IRS.
The civil penalties can be quite harsh. For instance, the civil penalty for willfully failing to file an FBAR can be as high as a year in jail and the greater of $100,000 or 50% of the total balance of the foreign account per violation. Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.
Beginning with the 2011 tax year, a new form called Form 8938 – Statement of Specified Foreign Financial Assets, needs to be filled out and attached to the annual income tax return. This form needs to be filed by U.S. taxpayers who have an interest in foreign financial assets including financial accounts, certain foreign securities and interests in foreign entities with an aggregate value exceeding $50,000. The penalty for failing to file form 8938 is s $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
Statement of Specified Foreign Financial Assets. This form must be filed by all US citizens and green card holders that meet the threshold for filing. In many ways, Form 8938 is a duplication of the FBAR requirements for Form TD F 90–22.1. The biggest differences are when, where, and how the information is reported.
The thresholds are different depending on where you live and your filing status. The IRS broke the thresholds into two major categories of filers and three sub categories with different thresholds. There are also two different thresholds for each category. Simple so far, right?
The two different thresholds for each category are the value of your foreign financial assets on the last day of the year and the value of your foreign financial assets at any time during the year. We created a simple outline to show the filing thresholds for all of the categories. The outline shows the Residency, Filing Status, Threshold for year-end value, and Threshold for a value during the year
United States — Single — $50,000 — $75,000
United States — Married Filing Joint — $100,000 — $150,000
United States — Married Filing Separate — $50,000 — $75,000
Foreign Country — Single — $200,000 — $300,000
Foreign Country — Married Filing Joint — $400,000 — $600,000
Foreign Country — Married Filing Separate — $200,000 — $300,000
Additional variables are applied to each case including currency exchange rates and types of financial assets at the very least depending on the individual situation.
There are a number of assets that must be reported including:
• Financial accounts held in a foreign financial institution (e.g. checking, savings, pension)
• Stock or securities issued by a non-US person or entity (e.g. stock traded on a foreign stock exchange)
• Interest in a foreign entity (e.g. ownership in a partnership)
• Financial interest in any instrument or contract involving a non-US person or entity.
Note that this reporting does not include physical assets such as your home or cars or artwork or jewelry, only your financial assets.
The services of an experienced international tax CPA and Attorney can help steer you through the most advantageous way to enter into compliance. Getting in touch with someone to discuss your unique situation is the most important first step you can take.