The U.S. Department of the Treasury and the IRS have issued comprehensive final regulations implementing Foreign Account Tax Compliance Act (FATCA) information reporting provisions. Under FATCA, foreign financial institutions (FFIs) – which can include foreign banks, brokers, insurance companies and investment funds – must disclose certain information to the IRS about their U.S. owned accounts.
The final regulations, issued in January 2013, include some notable changes from previous guidance on the requirements. Although the regulations are targeted at foreign financial institutions, they illustrate the focus the federal government is putting on foreign accounts and, in turn, the need for individual taxpayers holding such accounts to comply with their own reporting obligations.
FATCA calls for foreign financial institutions to file an annual report to the IRS, either directly or through its own national tax authority, on each U.S. taxpayer for whom it holds more than $50,000 in assets at the end of the year. The law also requires account holders to file an IRS form themselves, Form 8938, detailing their foreign holdings. Failure to file Form 8938 can result in a heavy penalty ($10,000 penalty for failure to file and an additional 40% penalty on underreported income).
Foreign Financial Institution Reporting
In addition to the annual report requirements, FATCA also generally requires foreign financial institutions to withhold 30% on certain U.S. connected payments to “recalcitrant” account holders. A recalcitrant account holder is one that fails to provide:
- The information required to determine whether the account is a U.S. account;
- The information required to be reported by the foreign financial institution; or
- A waiver of a foreign law that would otherwise prevent reporting by the foreign financial institution.
FATCA requires foreign financial institutions 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. Foreign financial institution’s that fail to provide the required information face significant U.S. tax penalties.
The final regulations extend the phased-in transition period for the due diligence, reporting and withholding requirements. For example, the due date for the first information report by foreign financial institutions for the 2013 and 2014 calendar years has been delayed from Sept. 30, 2014 to March 31, 2015.
Self-reporting by U.S. Taxpayers
In addition to the filing of Form 8938, U.S. taxpayers are also required to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), with the IRS if:
- The taxpayer had a financial interest in or signature authority over at least one financial account located outside of the United States; and
- The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported. Please note that the $10,000 threshold is U.S. $, so the account(s) value(s) should be translated converted to U.S. $ on each day of the year.
Are You in Compliance?
If you hold offshore financial accounts, it’s critical that you properly report them to the IRS. The final FATCA regulations will bring a heightened level of scrutiny of your foreign assets. To ensure you’re in compliance, or if you have questions regarding the FATCA regulations or FBAR filing requirements, please call your Warren Averett advisor.