“The Internal Revenue Service (IRS) has spent millions of dollars getting ready for FATCA and is still not prepared for the new law that goes into effect this July,” says the Treasury Inspector General for Tax Administration.
Does this shock you?
FATCA (Foreign Account Tax Compliance Act) requires foreign banks and investment funds to examine their accounts and report those with balances of $50k or more to the IRS. The IRS hopes to locate an estimated 7 million U.S. taxpayers with unreported offshore accounts.
FATCA, originally passed in 2010, is not to be confused with the FBAR (Report of Foreign Bank and Financial Accounts) requirement already in effect for the reporting of foreign bank accounts with balances of $10k or more, is scheduled to go into effect on July 1st for foreign banks and financial institutions. The Act uses two mechanisms to bring U.S. taxpayers into the reporting system – U.S. taxpayer reporting requirements and foreign financial institution reporting requirements.
(1) U.S. taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 must generally report information about those assets on Form 8938 annually with their tax return. Reporting applies for assets held in taxable years beginning after March 18, 2010.
However, in some circumstances, the threshhold is higher. See IRS Website. For example, taxpayers living abroad who file as “Single” 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. Taxpayers filing jointly must file if the value of specified foreign assets is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.
(2) Failure to report foreign financial assets on Form 8938 results in a penalty of $10,000 (and a penalty up to $50,000 for continued failure after IRS notification). Underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40%.
Foreign Financial Institutions
Foreign financial institutions are required to report to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. “Participating” foreign financial institutions must:
(1) undertake certain identification and due diligence procedures with respect to its account holders;
(2) report annually to the IRS on its account holders who are U.S. persons or foreign entities with substantial U.S. ownership; and
(3) withhold and pay over to the IRS 30-percent of any payments of U.S. source income, as well as gross proceeds from the sale of securities that generate U.S. source income, made to (a) non-participating FFIs, (b) individual account holders failing to provide sufficient information to determine whether or not they are a U.S. person, or (c) foreign entity account holders failing to provide sufficient information about the identity of its substantial U.S. owners.
The inspector general’s report could not have come at a worse time for the IRS. Already delayed twice, US banks, foreign banks, American expats living overseas and some foreign governments are anxious over the law and have asked for it to either be repealed or delayed. And the top IRS watchdog’s conclusion that the IRS is not ready for the law may just be the ammunition needed for these groups to curtail the unpopular law once again.
But I’m afraid to say that FATCA is here to stay as we approach July 1st. That means thousands of offshore banks, brokerage firms, hedge funds and insurance companies must be ready.
When coupled with the poor website for Obamacare, many people have no faith in the government’s ability to roll out new programs. But don’t let that give you a false sense of security of this falling through the cracks and BE prepared. The IRS and Justice Department have proven themselves to be very adept at discovering people and businesses with unreported foreign accounts and unfiled FBAR returns.
The penalties for having an unreported account can be huge. Although the IRS has several amnesty and voluntary disclosure options for those still not in compliance, many of those programs are off the table if the IRS gets your name first from a foreign bank.