LET’S TALK TAXES – The Foreign Account Tax Compliance Act (FATCA)
“Our offshore compliance effort is a multifaceted and multiyear effort. Probably, the next big thing, I hope, will be passage of FATCA, the Foreign Account Tax Compliance Act.”
IRS Commissioner Doug Shulman, April 2010, JofA, “Tax from the Top: Q&A with IRS Commissioner Doug Shulman”

The Foreign Account Tax Compliance Act (FATCA) is yet another weapon in the impressive arsenal available to the IRS for combating offshore tax evasion.  The intent of FATCA is to identify offshore accounts and investments owned by U.S. persons.  U.S. is engaging with more than 50 countries in negotiating and concluding bilateral agreements.  This effort reflects the desire of tax authorities all over the world to combat offshore tax evasion.

U.S. taxpayers have already started to feel the impact of FATCA when the specified foreign financial assets reporting became a requirement for 2011 tax filing.  This report requires U.S. taxpayers owning foreign assets over certain thresholds to report their foreign assets.

R, a resident of Texas, has an overseas bank account with over $200,000 for 2012.  For 2012, R has to meet the filing requirement of the specified foreign financial assets reporting.

As with all foreign asset reporting requirements, noncompliance with the specified foreign assets reporting carries steep penalties.

R who has a specified foreign financial assets reporting requirement for tax year 2012, does not file the Form 8938 with his 2012 tax return. R could be subject to a non-filing penalty of $10,000.

FATCA has other important provisions.  Beginning 2013, FATCA will subject foreign financial institutions (FFIs) to certain reporting and withholding requirements.  Participating FFIs, which are institutions that enter into agreements with IRS, will have to maintain documentation, withholding and reporting requirements for U.S. taxpayer accounts.  They will be subject to information return filings, similar to those required by U.S. financial institutions.  All other FFIs, which are nonparticipating, will be subject to a 30 percent withholding tax on all US-source payments unless the FFI certifies that it has no U.S. customers.

At least from 2014, if not earlier, U.S. taxpayers with income from foreign financial assets, held either directly or indirectly through FFIs, should expect direct reporting to the IRS.  For all accounts that hold at least $50,000 and identified by such institutions as owned by U.S. persons, names, identification numbers and account details will have to be reported to the IRS.

Given the scope, cost of implementation and complexity of this Act, there is understandably a considerable degree of confusion over its implementation.  Despite considerable opposition to this Act from FFIs and foreign countries, the U.S. continues to be committed to its implementation.

Disclaimer: Every individual’s tax situation is different and tax situations change over time. This article is intended to give general information to enable the reader to discuss their situation with a tax adviser.  It is not intended to be tax or legal advice and should not be construed as such.

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