On July 1, 2014, the Foreign Account Tax Compliance Act (FATCA) took effect targeting tax non-compliance by U.S. taxpayers with foreign accounts. The law was originally passed in March 2010 as part of the Hiring Incentives to Restore Employment Act. The U.S. economy was struggling to emerge from the recession and a law added on to address tax cheats received little debate. What has emerged is a law giving the U.S. Internal Revenue Service unprecedented extraterritorial powers to gather information on foreign financial institutions and their underlying account holders. The new law has sparked unintended consequences that are just beginning to emerge.
FATCA focuses on reporting by U.S. taxpayers about certain foreign financial accounts and offshore assets. It also has broad implications for foreign financial institutions about financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold a substantial ownership interest. The objective of FATCA is the reporting of foreign financial assets. However the law also carries a substantial penalty in the form of withholding as the cost of not reporting.
Taxpayers who own foreign assets of more than $50,000 ($100,000 jointly) at the end of the taxable year will be required to file a form 8938 and include it with their tax return. Form 8938 reporting applies for specified foreign financial assets in which the taxpayer has an interest in taxable years. There are two exceptions:
- If you do not have to file an income tax return that year, you do not need to file Form 8938, even if the value of your specified foreign assets is more than $50,000.
- You do not have to report financial accounts maintained by the foreign branch of a U.S. financial institution, or the U.S. branch of a foreign financial institution.
If the total value is at or below $50,000 at the end of the tax year, there is no reporting requirement for the year, unless the total value was more than $75,000 at any time during the tax year.
Single taxpayers living abroad must file if the total value of specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year; married taxpayers whose specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year must file.
The law defines an interest in specified foreign financial assets as any financial account maintained by a foreign financial institution containing:
- Stock or securities issued by someone other than a U.S. person
- Any interest in a foreign entity, and
- Any financial instrument or contract that has as an issuer or counterparty that is other than a U.S. person.
Individuals who fail to furnish the required information in a taxable year could face a penalty of $10,000 for such taxable year. Additionally, if a delinquency continues after 90 days of the individual receiving notice of such delinquency, the individual will incur a $10,000 penalty for each 30-day period after the 90-day period following the notice. This additional penalty is capped at $50,000.
The United States is the only large economy to tax its citizens on everything they earn anywhere in the world. FATCA requires banks, funds, and other financial institutions around the world to report assets held by their American clients or face a 30% withholding tax. To date, more than 77,000 financial institutions have agreed to pass information to the IRS. Foreign companies will need to use new IRS forms W-8 and W-9 to keep track of their U.S. and non-U.S. customers. The IRS initially published four different W-8 forms, addressing everything from individuals who will claim foreign status to foreign tax exempt foundations. A fifth W-8, the W-8BEN-E, which applies to U.S. entities doing business with foreign firms, was published recently.
The reporting requirements and potential penalties for non-compliance are so burdensome that many of the 7 million Americans living abroad have been rejected by foreign providers of banking services, insurance, and mortgages. Many Americans residing overseas are reporting banking lock-out. Some are concerned foreign firms will be less likely to hire Americans because of the extra tax complications. Not surprisingly, the number of Americans renouncing their citizenship has quadrupled since FATCA was passed.
The new FATCA reporting requirements can be challenging. There is the difficulty in determining whether certain assets are reportable and significant penalties for failing to report all interests in specified foreign financial assets. You should seek competent advice from a financial adviser or tax adviser knowledgeable in the reporting requirements of FATCA.
- FATCA is a new law focusing on reporting by U.S. taxpayers about certain foreign financial accounts and offshore assets.
- FATCA requires taxpayers who own foreign assets of more than $50,000 ($100,000 jointly) to file a form 8938 and include it with their tax return.
- Taxpayers who fail to report the required information in a taxable year could face a penalty of $10,000.