By: Coleman Jackson, Attorney & Certified Public Accountant
January 15, 2014
What is FATCA?
The Foreign Account Tax Compliance Act is better known as FATCA. FATCA was enacted in March 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act by the United States Congress to target non-compliance with 26 U.S.C. (Internal Revenue Code) by United States taxpayers using foreign accounts.
The FATCA is a set of U.S. tax laws that impose mandatory tax compliance rules on specified individuals with interest in specified foreign financial assets held in foreign financial institutions (FFI). Under this act the foreign financial institutions such as offshore local banks, stock brokers, hedge funds, insurance companies and trusts are required to report directly to the IRS (The United States Internal Revenue Service), certain accounts of U.S. citizens, permanent residents (lawful permanent residents), and certain non-residents holding certain offshore investments, assets or accounts.
The FATCA also requires foreign asset disclosure by specified individuals, which includes United States Citizens, resident aliens (Green Card Holders), and certain non-resident aliens) who have foreign financial assets in excess of $50,000 on the last day of the tax year or $75,000 at any time during the tax year (higher reporting threshold amounts apply to married individuals filing jointly. The threshold amount for bona fide residents overseas, for single filers $200,000 and for joint filers $400,000). Specified individuals who meet these reporting thresholds must report foreign assets on “Form 8938, Statement of Specified Foreign Financial Assets”. This tax disclosure report is filed annually with the taxpayer’s tax return. Further there may also be income tax reporting requirements if the specified individuals earn income on the foreign assets, such as, interests, dividends, and profits, etc since generally, U.S. citizens and permanent residents are taxed on their worldwide income from whatever source, whether it is earned within the United States or offshore.
FATCA imposes separate and additional requirements than the Report of Foreign Bank and Financial Accounts (FBAR). The FBAR imposes a separate and distinct annual reporting requirement on U.S. persons, which include U.S. citizens, resident aliens (Green Card Holders), trusts, estates, and domestic entities that have an interest in foreign financial accounts where the account balance is $10,000 any time during the year. Certain account aggregation rules apply where more than one account could be added together to determine whether the $10,000 threshold is met. FBARS are due by June 30th of each year. If you think you might be subject to either FATCA or FBAR, you should seek competent tax counsel immediately.
This blog is written for general educational purposes; it is not designed to advise you with respect to your specific situations, and it is not intended or written to be used for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or promoting, marketing, or recommending this transaction or a tax-related matter to another party.
Purpose of FATCA
The Foreign Account Tax Compliance Act (FATCA) is to prevent U.S. taxpayers from avoiding United States Tax laws (Internal Revenue Code) by hiding behind foreign entities or parking money offshore. This new act is designed to discover United States taxpayers who are engaged in income tax evasion through the use of foreign accounts at UBS and other similar offshore banks, entities and other offshore financial institutions. The FATCA compels foreign financial institutions (FFIs) to fully disclose its U.S. account owners or subject them to mandatory withholding.
Impact of FATCA
The Foreign Account Tax Compliance Act (FATCA) is not just another tax issue with implications only within the United States of America. FATCA’s reach is global; placing duties and responsibilities on foreign institutions and United States citizens, permanent residents and certain non-residents. It is a comprehensive and extensive asset reporting system impacting world commerce. Since enacting FATCA in 2010, the United States government has been seeking cooperation from FFIs and gathering implementation cooperation agreements from countries around the globe. These agreements make it more likely than not that U.S. citizens, permanent residents and certain non-residents’ offshore assets will be discovered by the U.S. Treasury.
Foreign financial institutions (FFI) who fail to enter into an agreement with the IRS could face significant consequences. The FFI would be subject to a 30% withholding tax on any “withholdable payment” made to its proprietary account for failing to comply with the Foreign Account Tax Compliance Act.
The FFI would be obligated to deduct a 30% withholding tax on withholdable payments credited to the taxpayers’ accounts who fails to provide the required documentation pursuant to FATCA requirements.
Penalty for Non-Compliance under FATCA & FBAR
Specified individuals who fail to comply with FATCA are subject to a penalty up to $10,000 for each 30 days of non-filing after receipt of an IRS notice of failure to disclose under FATCA, for a maximum potential penalty of $60,000 and possible criminal prosecution.
And if the FBAR also applies in the taxpayers situation, a non-willful U.S. person could be subject to a $10,000 penalty, and if willful non-compliance, the penalty could be up to and greater than $100,000 or the account balance. Criminal penalties also can be assessed under the FBAR.
Currently, U.S. citizens, permanent residents and certain non-residents with delinquent offshore account issues could possibly voluntarily disclose their foreign assets, accounts and holdings under a reduced civil penalty regimen and possibly avoid criminal prosecution, if they qualify, for the Offshore Voluntary Disclosure Program, (“OVPD”). The 2012 OVPD offers clear benefits to encourage taxpayers to disclose foreign accounts now rather than risk detection by the IRS and possible criminal prosecution. It is not known how long voluntary disclosure will remain an option because the 2012 Offshore Voluntary Disclosure Program does not have a set expiration date.
Some possibly Impacted Business Units, Functions and Industries
- Investment banking
- Private wealth/banking
- Retail banking
- Prime brokerage
- Corporate tax
- Tax operations
- Compliance (e.g. Anti-Money Laundering)
- Information technology (IT)
- Payment processing settlement
Where to Find Help?
COLEMAN JACKSON, P.C.
Immigration & Tax Law Firm
6060 North Central Expressway, Suite 443
Dallas, Texas 75206
Office Phone: (214) 599-0431 (English) (214) 599-0432 (Spanish)