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Friday, November 20, 2015

What is FATCA and Why Should I Care?


In 1975 only a few U.S. taxpayers had offshore Swiss Bank accounts.

This escalated to the point where the U.S. government was losing an estimated $100 billion in tax revenues annually. Consequently along came FATCA.

FATCA stands for the Foreign Account Tax Compliance Act. The legislation was passed into law in 2010 and is designed to increase tax compliance by Americans with financial assets held outside the United States.

The legislation imposes a mandate on all foreign financial institutions (“FFI”) or nonfinancial foreign entities (“NFFE”) to determine who among their clients are “U.S. Persons” and report directly to the IRS information relating to those clients. FFIs and NFFEs not complying with these reporting requirements will be subject to a 30% withholding tax on all U.S. source fixed or determinable annual or periodic income (FDAP), such as dividends and interest, as well as on the proceeds from the sale or disposition of property that can produce U.S. source FDAP.

Who must report?
An FFI is defined very broadly. It includes a foreign bank, mutual fund, insurance company, investment company, pension fund, broker dealer and private equity firm. NFFEs are defined as non-publically listed corporations or business entities registered outside the U.S., which have a 10% or more U.S. Shareholder. These NFFEs must report on the details of the shares held by the U.S. person(s) meeting the 10% threshold.

What will be reported?
FFIs are required to report directly to the IRS the name, address, and account number of all U.S. clients. They must also report the highest daily account value in U.S. dollar over the year and transactions in the account. U.S. clients include U.S. Citizens, U.S. residents, green card holders as well as trusts controlled by U.S. persons.

What does this mean to an individual with foreign assets abroad?
FFIs are scrambling to paper their files with information provided by their overseas clients to document whether they are U.S. Persons in order to avoid the 30% withholding penalty mentioned above. Because of the complexity of FATCA, we are seeing our clients being asked by FFIs to complete various types of forms of varying complexity and length. Some of these forms are straight forward, but some of them are complicated and littered with technical language related to FATCA that is difficult to understand.

If you are asked by your foreign bank or other FFI to complete one of these forms, the first thing is not to panic. The information requested is being requested from every client of the bank/FFI that appears to be “foreign.” This is not an indication that there is any trouble, or that the FFI is working with a government or is in the process of providing a government with your information. In fact, the forms used to collect this data are required to be kept by the FFI, not filed with any tax authority. If the application is not clear, feel free to contact anyone in Armanino’s international tax group for assistance.

Also, U.S. taxpayers who have foreign financial accounts which are required to be disclosed to the U.S. authorities but have not been, need to consider their options. There are various voluntary disclosure programs available to them, but these are generally only available before the IRS is in receipt of relevant information. As a result of the FATCA reporting requirements the window of opportunity for coming forward voluntarily is starting to close more rapidly.

What are the implications of FATCA?
There may be severe penalties for not disclosing foreign financial accounts when required to do so. In the past many taxpayers have adopted the attitude that the IRS will not find them. With the introduction of FATCA, FFIs are concerned about meeting their compliance requirements.

There have been some high profile situations with banks that have not complied and tough lessons have been learned by them.

It is therefore highly likely that undisclosed foreign financial accounts held by U.S. taxpayers at FFIs will be discovered by the U.S. authorities sooner rather than later. U.S. taxpayers should therefore consult with their tax advisors soon. The ostrich approach (i.e. head in the sand) is not recommended.

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