The Foreign Account Tax Compliance Act (FATCA) is designed to combat tax evasion by U.S. persons holding investments in offshore accounts.
There are two aspects to FATCA:
1. Foreign financial assets
Certain U.S. taxpayers holding specified financial assets outside the United States must report those assets to the IRS.
2. Reporting by foreign financial institutions
FATCA requires foreign financial institutions to report directly 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.
Foreign Financial Assets
FATCA requires certain U.S. taxpayers holding foreign financial assets to report information about those assets on Form 8938 which must be attached to the taxpayer’s annual tax return. For most taxpayers reporting begins with the 2011 tax year. Failure to report foreign financial assets on Form 8938 can result in a penalty of $10,000 (and a penalty up to $50,000 for continued failure after IRS notification). Further, underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40%.
If you are a taxpayer living abroad you must file Form 8938 if:
- You are filing a return other than a joint return and the total value of your 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; or
- You are filing a joint return and the value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.
A specified foreign financial asset is:
- Any financial account maintained by a foreign financial institution, except the foreign branch of a U.S. financial institution, or the U.S. branch of a foreign financial institution.
- Other foreign financial assets held for investment that are not in an account maintained by a U.S. or foreign financial institution, namely:
- Stock or securities issued by someone other than a U.S. person
- Any interest in a foreign entity, and
- Any financial instrument or contract that has as an issuer or counterparty that is other than a U.S. person.
Foreign Financial Institutions
FATCA also requires foreign financial institutions to report directly 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. To properly comply, foreign financial institutions will have to enter into a special agreement with the IRS by June 30, 2013, and will be obligated to undertake certain identification and due diligence procedures with respect to its accountholders, report annually to the IRS on its accountholders who are U.S. persons, and withhold and pay over to the IRS 30% 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 foreign financial institutions, (b) individual accountholders failing to provide sufficient information to determine whether or not they are a U.S. person, or (c) foreign entity accountholders failing to provide sufficient information about the identity of its substantial U.S. owners.