Implemented to prevent tax avoidance by hiding assets in foreign accounts, the Foreign Account Tax Compliance Act (FATCA) became effective for the 2011 tax year for certain taxpayers with over $50,000 in foreign accounts. The drama began in 2009 when Swiss bank UBS paid a $780 million fine for encouraging U.S. taxpayers to hide assets in Swiss accounts. Affected taxpayers not paying attention got a wake-up call when the foreign financial institutions (FFIs) withholding provisions of FATCA became effective in 2014.
FATCA requires FFIs to provide the IRS account numbers, balances, names, addresses and U.S. identification numbers. More than 80 nations, including China, may be found on the IRS searchable list of complying financial institutions by using the FFI List Search and Download Tool and User Guide. Countries on board are at FATCA – Archive.
All FFIs must comply with FATCA, or be subject to withholding. FATCA also impacts U.S.-based companies and foreign companies with U.S. assets or clients. FFIs enter into an agreement with the IRS requiring them to report information on the FFI’s U.S. accounts. More than 140,000 banks and other firms have signed up to comply with FATCA, according to a story in The Wall Street Journal on Feb. 10, 2015.
If an FFI does not enter into an agreement with the IRS, all relevant U.S.-sourced payments, such as dividends and interest paid by U.S. corporations, are subject to a 30 percent withholding tax. The same 30 percent withholding tax will also apply to gross sale proceeds from the sale of relevant U.S. property. FATCA requires foreign banks to reveal Americans with accounts over $50,000. Non-compliant institutions could be frozen out of U.S. markets.
Affected taxpayers file Form 8938 with their 1040s. Form 8938 is a separate reporting requirement from FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). An individual may have to file both forms. Separate penalties apply for failure to file each form. FinCEN is the Financial Crimes Enforcement Network. See the Comparison of filing requirements for further information.
U.S. citizens in the U.S. and any resident alien must file Form 8938 if the aggregate value of specified foreign financial assets at the end of the year is more than $100,000 for married taxpayers filing a joint return or more than $150,000 at any time during the tax year. The threshold quadruples for citizens whose tax home is in a foreign country and is physically present in a foreign country or countries for at least 330 days.
U.S. Income Tax Obligations When Living Abroad U.S. Citizens and green card holders are required to file a U.S. income tax return and report worldwide income no matter where they live. U.S. citizens including those with dual citizenship who have lived or worked abroad during all or part of the year, generally have a U.S. tax filing requirement to report income from all sources within and outside of the U.S. Even the mayor of London, Boris Johnson received a tax bill from the IRS in 2014. Although he has not lived in the U.S. since he was a child of five Johnson holds dual citizenship, having been born in the U.S. The IRS launched new online videos to help taxpayers living abroad understand their U.S. tax obligations at IR-2015-85.
The IRS provides taxpayers with undisclosed income from offshore accounts an opportunity to get current with their tax returns with the Offshore Voluntary Disclosure Program (OVDP). The penalty was raised from 27.5 percent penalty to 50 percent on Aug. 4, 2014.
The only way to avoid the FATCA and FBAR reporting requirement is to renounce U.S. citizenship and follow in the footsteps of singer Tina Turner and Facebook co-founder Eduardo Saverin. The U.S. government treats citizenship renouncement as a taxable event. All property is deemed to have sold on the day before expatriation, and is taxed on the gains from such theoretical sale on a marking to market basis for any property held by the expatriate. To renounce U.S. citizenship you swear an oath of renunciation, hand over your passport, give up your legal rights as a citizen, and potentially pay an exit tax. The State Department collects a fee of $2,350.00 to cover the process, which includes two interviews to ensure the American fully understands the consequences of renunciation.
International FATCA compliance by global FFIs prevents tax avoidance on worldwide income. The fact is complying with FATCA is serious business. As is true with any IRS regulation, don’t ignore it.