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FATCA Facts

Posted by Admin Posted on July 08 2016

A short run-through regarding the 

Foreign Account Tax Compliance Act 

(FATCA)

The United State levies income taxes on its citizens, regardless of residency. This requires Americans that live abroad to pay U.S. taxes on foreign income. Generally, U.S. persons are generally required to report and pay taxes on income from ALL source, under U.S. tax law. To help to this end, FATCA was signed into law.

FATCA stands for Foreign Account Tax Compliance Act. It is a Unites States statute, which was enacted by Congress, and is part of the Hiring Incentives to Restore Employment (HIRE) Act of 2010. FATCA requires persons of the United States, including those individuals living outside of the United States, to report ALL of their financial accounts held outside of the United States. It also requires foreign financial institutions to report on their American clients, to the Internal Revenue Service (IRS). FATCA is designed to make it more difficult for US taxpayers to conceal/hide assets held in offshore accounts and shell companies and helps the IRS to recoup federal tax revenues. Taxpayer identification numbers and source withholding are used to enforce foreign tax compliance. The IRS previously instituted the Qualified Intermediary program. It required “participating” foreign financial institutions to maintain records for the U.S. or foreign status of their account holders and to report income and withhold taxes. Compliance was poor. Self-reporting of foreign financial assets was also found to be ineffective.

The first provision of FATCA requires foreign financial institutions, such as banks, to enter into an agreement with the IRS to identify their U.S. account holders and disclose the account holders’ names, TIN’s, addresses, account balances, receipts, and withdrawals. U.S. payers making payments to non-compliant foreign financial institutions are required to withhold 30% of the gross receipts.

The second provision of FATCA is U.S. persons owning foreign accounts or other specified financials assets must report them on the Form 8938, Statement of Specified Foreign Financial Assets. This form is filed along with the person’s U.S. tax returns. The reporting thresholds are:


TAXPAYERS LIVING INSIDE THE UNITED STATES

Unmarried taxpayers – the total value of your specified foreign financial assets is more than $50,000 USD on the last day of the tax year or more than $75,000 at any time during the tax year.

Married taxpayer filing a joint income tax return - the total value of your specified foreign financial assets is more than $100,000 USD on the last day of the tax year or more than $150,000 at any time during the tax year.

Married taxpayer filing separate income tax return - the total value of your specified foreign financial assets is more than $50,000 USD on the last day of the tax year or more than $75,000 at any time during the tax year.

TAXPAYERS LIVING OUTSIDE THE UNITED STATES

Unmarried taxpayers – the total value of your specified foreign financial assets is more than $200,000 USD on the last day of the tax year or more than $300,000 at any time during the tax year.

Married taxpayer filing a joint income tax return - the total value of your specified foreign financial assets is more than $400,000 USD on the last day of the tax year or more than $600,000 at any time during the tax year.

Married taxpayer filing separate income tax return - the total value of your specified foreign financial assets is more than $200,000 USD on the last day of the tax year or more than $300,000 at any time during the tax year.

Account holders would be subject to a 40% penalty on understatements of income in an undisclosed foreign financial asset. Understatements of greater than 25% of gross income are subject to an extended statute of limitations period of six years.

The third provision of FATCA is that it closes the tax loophole that foreign investors had used to avoid paying taxes on U.S. dividends by converting them into “dividend equivalents” through the use of swap contracts.

With all of this said, FATCA is surrounded with controversy. It is said that the cost to implement outweighs the benefit of the additional revenue. The complexity of the legislation has already pushed the implementation back twice. Is the IRS ready to handle the millions of new “complicated” filings each year? The U.S. is not funding the foreign governments that would be responsible for collecting these taxes and sending them to the U.S. How will this effect foreign relations? Will this provide an incentive for foreign financial institutions to no longer invest in the U.S.? I guess that only time will tell.

 

-Michael Hermanson, CPA | CGMA

 

Sources: 

Irs.gov

Wikipedia.com

Thomsonreuters.com

AICPA.org