What Taxpayers Need To Know About FATCA Facts
FATCA was enacted in March 2010 and focuses on targeting non-compliance by U.S. taxpayers by focusing on reporting:
- By U.S. taxpayers about certain foreign financial accounts and offshore assets.
U.S. individual taxpayers must report information about certain foreign financial accounts and offshore assets on Form 8938 and attach it to their income tax return, if the total asset value exceeds the appropriate reporting threshold. Form 8938 reporting is in addition to FBAR reporting.
- By foreign financial institutions about financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold a substantial ownership interest.
To avoid being withheld upon, a foreign financial institution may register with the IRS, obtain a Global Intermediary Identification Number (GIIN) and report certain information on U.S. accounts to the IRS.
U.S. financial institutions and other U.S withholding agents must both withhold 30% on certain payments to foreign entities that do not document their FATCA status and report information about certain non-financial foreign entities.
If a jurisdiction enters into an Intergovernmental Agreement (IGA) to implement FATCA, the reporting and other compliance burdens on the financial institutions in the jurisdiction may be simplified. Such financial institutions will not be subject to withholding under FATCA.
While reporting by U.S. taxpayers about certain foreign financial accounts and offshore assets started with tax year 2011, reporting by foreign financial institutions about financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold a substantial ownership interest is now finally in fact and implementation rolling out across the world amongst countries and foreign financial institutions. The reach of FATCA is tremendous.
The FATCA (Foreign Account Tax Compliance Act) requires foreign financial institutions to disclose information on accounts held by U.S. taxpayers. The impetus for financial institutions to provide the information is that they can be penalized and/or frozen out of U.S. markets, which for most financial institutions worldwide, is not a viable option, so banks are complying and are in various stages of implementing their disclosure of account holder information.
As a result of FATCA, worldwide banking is more transparent then ever including in countries that took pride in their lack of transparency and privacy, such as Switzerland. With the threat of being cut off from U.S. financial markets if data was not shared, more than 80 nations to date, including well-known tax havens such as Switzerland, have agreed to the law and have accepted information sharing agreements with the U.S. Foreign Financial Institutions (FFI) must report account numbers, balances, names, addresses and U.S. identification numbers. As a result, FFIs are sending letters to account holders in which there is an indication that they may be a U.S. taxpayer requesting additional information or confirmation. Don’t ignore the letter or respond dishonestly – the U.S. can also receive information on account holders that are suspected to be U.S. taxpayers but have responded in the negative or not at all to such letters.
As you may know from our other articles, U.S. taxpayers are subject to taxation on their worldwide income regardless of where they live in the world. FATCA is another notch in the U.S. belt to tighten down and ensure compliance from U.S. taxpayers of their tax and reporting obligations and to reduce the gap of unreported (and untaxed) income.
U.S. taxpayers that have foreign financial accounts and have an FBAR filing requirement (and/or Form 8938) are running out of time to beat the IRS to get back into compliance. Caution and concern is the order of the day as it will be critical to file before the IRS is aware of your filing obligation and that you are out of compliance. Once the IRS is aware, taxpayers can be subject to extremely painful civil and potentially criminal penalties as well. With the power of FATCA, the IRS will have information at their fingertips to identify non-compliance by U.S. taxpayers.
To learn more, please read our article on IRS Form 8938.