The Impact of the Foreign Account Tax Compliance Act (FATCA) of 2010
Breathes there the man with soul so dead, who never to himself hath said, “This is my own, my native land.” - Edward Everett Hale, “The Man Without a Country”
Poetic and patriotic words, but the reality of today is that many U.S. citizens don’t feel this way about their native land. In 2015, 4,279 U.S. persons relinquished or renounced their U.S. citizenship, a record-breaking amount. Many analysts project that the total number of renunciations or relinquishments in 2016 will exceed the 2015 mark. To put these numbers in perspective, less than 300 people renounced their U.S. citizenship in 2006.
Looking at statistics like these, you may ask yourself: “Why are so many people giving up U.S. citizenship?” And possibly, “Is this something I should consider?”
The Foreign Account Tax Compliance Act (FATCA) of 2010 and other U.S. tax reporting regulations may have something to do with why this is happening.
A simplified explanation of the FATCA legislation is as follows:
- It is primarily aimed at preventing tax evasion by U.S. taxpayers through the use of non-U.S. financial institutions and offshore investments.
- Foreign financial institutions are required to identify accounts held by U.S. persons and report account information to the IRS. Absent this information, they are required to withhold U.S. tax on U.S. source income paid and may decline account opening or terminate services.
Furthermore, the U.S. tax system is based on citizenship. A U.S. citizen pays tax on their worldwide income no matter what country they live in.
Beyond the tax compliance burden, the financial institution impact of the FATCA legislation has significantly impacted U.S. citizens living abroad. Rather than attempt to comply with FATCA reporting requirements, many foreign financial institutions are simply refusing to open or hold accounts for U.S. persons.
To alleviate the financial hardship and tax compliance burden, many U.S. citizens living abroad have decided not to maintain their U.S. citizenship. U.S. citizenship can be terminated through renunciation. A formal renunciation of U.S. citizenship must be made in a foreign state, generally at a U.S. consulate, and there are several State Department forms to file along with a processing fee.
In addition to the paperwork and fees, the exit tax under Internal Revenue Code Sec. 877A may apply. Generally speaking, in order to avoid the exit tax you must:
- be current with U.S. tax filings for the past 5 years,
- have had annual U.S. tax liabilities below $160,000 for those 5 years, and
- a net worth of less than $2,000,000.
If you find yourself in the situation where you are considering renunciation of your U.S. citizenship, there are planning opportunities and compliance requirements that must be considered. Contact Freed Maxick's International Expatriate Tax Services professionals to discuss your specific situation, or call to speak with an individual directly at 716.847.2651.View full article
Some U.S. taxpayers have used foreign accounts to hide income subject to U.S. taxes. As a result all U.S. taxpayers, and many non-U.S. financial institutions, must comply with information reporting and withholding rules related to accounts outside of the States.
Ronald Reagan was known for quoting a Russian proverb to the Soviet leader: “Doveryai, no proveryai.” In English, “Trust, but verify.” The U.S. Treasury and the IRS have taken a similar approach when it comes to taxpayers holding accounts and transacting business outside of the United States. Those who hold accounts or send money out of the U.S. need to know about the related reporting and withholding rules or risk encountering an enforcement “bear in the woods.”
This discussion requires serving a large bowl of abbreviation alphabet soup, so we’ll make that the appetizer before we get to the main course.
FBAR: Refers to the “Report of Foreign Bank and Financial Accounts” that U.S. taxpayers file to identify financial accounts held outside of the States.
FATCA: Stands for “Foreign Account Tax Compliance Act.” Enacted in 2010, fully effective in 2014, this law expands the types of foreign assets and related income that U.S. taxpayers have to report. Through a series of inter-governmental agreements (IGAs), this law also requires financial institutions in many other countries to provide information to the IRS about accounts and assets held abroad by U.S. taxpayers.
FDAP: This stands for “fixed, determinable, annual or periodic” income, which, if you think about it, is pretty much all income. It applies primarily to foreign persons and businesses earning income in the U.S. Reports that relate to FDAP are used to track payments that leave the U.S. for reasons other than investment or deposit in foreign countries.
In short, FBAR, FATCA and FDAP reporting requirements form the backbone of the “trust” end of the equation. Each of these concepts includes at least some element of self-reporting by U.S. taxpayers on payments made and corresponding withholding, amounts held in foreign accounts and income earned outside of the country. (For more information on FBAR, please see Susan Steblein’s post from July 2015.) (For more information on FDAP, please see my post from March 2015.)
Of the three, FATCA holds down the “verify” side of the equation. Through a network of intergovernmental agreements, the U.S. has actually managed to place reporting requirements on foreign financial institutions. While those financial institutions may not be wild about the idea, they comply because they value the opportunity to do business with the U.S. and its taxpayers. As a result, many foreign financial institutions now regularly report information about assets of U.S. taxpayers that they hold. In some instances, the agreements require foreign institutions to withhold 30% of payments made to U.S.-held accounts if circumstances warrant. The IRS has gone so far as to levy penalties against some covered institutions that have failed to comply with the rules. In addition, financial institutions are now sending account holders reports with detailed account information that they have supplied to the IRS, giving a reality check to the process.
The IRS estimates that the U.S. loses approximately $450 billion per year in taxes on assets held and income generated overseas by U.S. taxpayers. With that kind of money in play, it seems pretty reasonable to expect that enforcement in this area is a high priority for the Service now and for the foreseeable future. The good news is that if you are a U.S. taxpayer who has failed to comply, there are opportunities to mitigate potential penalties by coming forward voluntarily. These voluntary disclosure programs will not last forever, and taxpayers who are audited by the IRS lose the opportunity to reduce penalties if they don’t initiate the process on their own.
If you have tax obligations in the U.S. and hold accounts or conduct business outside of the country, it’s important to make sure that you are in compliance with these rules. For help in figuring out what obligations you might have, please contact us.View full article
By Howard Epstein, CPA Director
Canada and the United States have signed a tax information sharing agreement, months ahead of implementation of a new U.S. law to help the IRS crack down on offshore tax avoidance.
The so called intergovernmental agreement (IGA) was made in an effort to address Canadian government concerns about the reach of Washington’s Foreign Account Tax Compliance Act (FATCA) that will go into effect in July 2014.
FATCA would have forced Canadian banks to provide the IRS information on accounts held mainly by U.S. citizens and residents with accounts in excess of $50,000. Additionally, it would have automatically imposed a 30% U.S. withholding tax on non-compliant foreign businesses. To date Washington has signed 21 other agreements with other individual countries, including Hungary this month and Italy and Mauritius in December.
Under the terms of the IGA, Canadian tax authorities will be allowed to collect information from the country’s banks and share it with the IRS under an existing bilateral tax treaty. Government officials indicated that the IGA narrows the scope of information required to be collected from account holders in Canada. Some smaller financial institutions will be exempt as well as certain registered savings vehicles such as Canadian Registered Retirement Savings Plans.
Recent estimates show that about 1 million U.S. citizens reside in Canada and many may be affected by the new agreement. Canadian banks will start collecting information in July of this year and the Canada Revenue Service will begin reporting to the IRS in 2015.
FATCA provisions were originally scheduled to take effect on Jan. 1, 2013. In 2011, the start-date was postponed to Jan. 1, 2014 and then in the middle of last year the start date was pushed back again to July 1, 2014. In the meantime, the U.S. Treasury and IRS are rushing to finish FATCA rules and associated forms that financial institutions need to avoid the law’s tax penalty.
With the implementation of FATCA and the government entering into these IGA’s, the IRS continues to tighten the net they are casting on US citizens residing in US and abroad that have ignored their Foreign Bank Account Report (FBAR) filling requirements. The penalties for willfully choosing to not file the Form 114 by June 30th each year can be devastating, but there are programs in place for taxpayers to come forward voluntarily and remediate or eliminate potential penalties.
If you are someone who has not been compliant with their FBAR filings you should contact a tax professional as soon as possible to discuss your options.
In April of 2010, the Department of the Treasury and the IRS asked for public comment regarding guidance projects and issues concerning interpretation and implementation of the new Foreign Account Tax Compliance Act (FATCA) provisions that stemmed from the HIRE Act of 2010. Unlike its FBAR compliance efforts that rely on delegated authority from the FinCEN and that are restricted due to concerns in the use of tax return or tax return information under Internal Revenue Code ( I.R.C.) 6103, the new provision eliminates these concerns and allows the IRS to use its own tax administration authority.
While there are benefits to the IRS using its own tax administrative authority, there are still some issues. Many of the issues encountered with the FBAR will continue to plague the new provision as well. For example:
The IRS will face the same problem with the new FATCA provisions as it does with the FBAR provisions, as there is no easy method to determine what constitutes the potential population filing base.
The new provision will be self-reported, similar to the FBAR.
Other roadblocks include the burden of what taxpayers will face, and increases filing requirements that have become considerably more complicated as a result of the addition of the FATCA filing. For example:
In addition to the required FBAR filing, taxpayers are now required to file the new FATCA information.
Taxpayers may also find that certain terms are defined differently in the BSA regulations and the Internal Revenue Code. For example, the term United States is defined in the BSA regulations as …the States of the United States, the District of Columbia, the Indian lands, and the Territories and Insular Possessions of the United States.20 While in the I.R.C. it is defined as “United States” when used in a geographical sense includes only the States and the District of Columbia
(Source from IRS.gov/pub/IRS-wd I.R.C 7701(a)(9) (2010).
Are you hitting roadblocks in filing your FBAR and FATCA? Do you have questions on how to navigate the complex IRS tax rules? If so, we can help. Freed Maxick is committed to helping you! Contact us today to get started.