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Thursday, March 6, 2014

Final FATCA Regs Remind Individual Investors of Reporting Requirements


The U.S. Department of the Treasury and the IRS have issued what is expected to be their final significant package of regulations implementing the Foreign Account Tax Compliance Act (FATCA). Although FATCA targets foreign financial institutions (FFIs)—including foreign banks, brokers, insurance companies and investment funds—to disclose to the IRS certain information about their U.S.-owned accounts, this powerful law can affect the American individual investor. The law is intended to combat offshore tax evasion.

Self-reporting Requirements for U.S. Taxpayers
It’s not just financial institutions that must report on foreign accounts. FATCA requires certain “U.S. taxpayers” holding foreign financial accounts with an aggregate value that exceeds $50,000 at the end of the tax year ($100,000 for joint filers) or with a total value of more than $75,000 at any time during the tax year ($150,000 for joint filers) to report certain information about those assets on Form 8938, “Statement of Specified Foreign Financial Assets,” along with their annual tax returns. The threshold is higher for those living outside the U.S.

The IRS has indicated that it will issue future regulations requiring a domestic entity to file Form 8938 if the entity is formed or used to hold specified foreign financial assets and the total asset value exceeds the appropriate reporting threshold. Until that time, only individuals must file Form 8938.

Both individuals and entities, however, may need to file Financial Crimes Enforcement Network (FinCEN) Form 114, “Report of Foreign Bank and Financial Accounts (FBAR),” which supersedes the former Form TD F 90-22.1. “U.S. taxpayer” must file FBARs with the IRS by June 30 of the following year for each year that:

  • The person had a financial interest in or signature authority over at least one financial account located outside of the United States, and
  • The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.

The term “U.S. taxpayer” includes U.S. citizens, residents, entities (including, but not limited to, corporations, partnerships and limited liability companies), and trusts or estates. A person who holds a foreign financial account may have a reporting obligation even though the account produces no taxable income.

As information about foreign financial assets increasingly makes its way to the IRS from FFIs, the odds of falling in the agency’s crosshairs by neglecting to file Form 8938 or FBAR will become greater, as will the likelihood of incurring a costly penalty.

Protect Yourself
If you hold offshore financial accounts, it’s essential that you properly report the required information to the IRS. This latest round of regulations, along with the coming effective date for the withholding requirements, signals an ever tighter focus on foreign assets on the horizon.

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