Written by International Tax Manager, David Levine
The Foreign Account Tax Compliance Act (“FATCA”) affects US taxpayers with foreign accounts and assets. Costs to report to the IRS will increase for these additional reporting requirements. There will also be increased penalties for non-compliance.
US taxpayers are well aware of the requirements to file with the Department of the Treasury form TD F 90-22.1, Report of Foreign Bank and Foreign Accounts (“FBAR”) for foreign financial accounts with an aggregate minimum amount of $10,000 in which the US taxpayer has signature authority over.
FATCA introduces a second set of filings now to accompany the US 1040 return. This requirement is for US taxpayers with foreign accounts and assets in excess of $50,000 to file information reports to be attached and submitted with the 1040. It is unclear whether the $50,000 threshold is the balance of the foreign account at the year-end or at any time in the year.
FATCA provisions apply to foreign accounts or assets held during the tax year beginning after March 18, 2010.
The new FATCA requirement is broader than the FBAR requirements. As an example, FATCA requires the reporting of taxpayer investments in foreign hedge funds or private equity funds, whereas FBAR did not require reporting of these.
FATCA disclosures must include the name, address and account number of the foreign financial institution or name and address of the issuer of the stock or security (similar disclosure of other assets) plus the maximum value during the year.
Specified Foreign Financial Assets are:
(a) Any financial account maintained by a foreign financial institution;
(b) Any stock or security issued by a non-US person;
(c) Any financial interest or contract that has a non-US issuer; and
(d) Any interest in a foreign security.
Therefore, ownership of foreign real estate through a foreign entity will have a filing obligation. In addition, any domestic entity will be required to file the same as individuals. Non Resident Aliens are not required to file. The penalty for failing to file is a minimum of $10,000 and it increases by $10,000 for each 30-day period following notification to file by the IRS, to a maximum of $50,000.
Foreign financial institutions with US customers and foreign non-financial entities with US owners will be required to disclose information regarding the US taxpayer for years beginning after 2012. Failure to do so will subject these institutions and entities to a 30% withholding tax for payments of US source income to them.