Over the past few years, the IRS has instituted aggressive rules to force Foreign Financial Institutions (FFIs) and Non-Financial Foreign Entities (NFFEs) to enter into FATCA (Foreign Account Tax Compliance Act) agreements which require compliance with strict reporting requirements on the assets and financial accounts of all US taxpayers. Owners of offshore accounts, thinking their assets are safe, might be at risk of heavy penalties.
FATCA is an IRS initiative aimed at preventing U.S. citizens and taxpayers from avoiding income tax payments on foreign investments and accounts. FATCA became effective on January 1, 2013, and requires foreign institutions to report to the IRS the existence of offshore accounts and investments by U.S. taxpayers. In countries that have FATCA agreements with the U.S., withholding agents are required to automatically withhold 30% of certain payments to foreign financial institutions (“FFI”) until the FFI agrees to remit certain information to the IRS. Nearly 70 countries have signed FACTA agreements with the IRS to date.[See http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA-Archive.aspx for list]
The rules and strategies in this area of tax law have undergone a number of changes in the past few years, however this is an area of tax law that The Tax Lawyer - William D. Hartsock - has been working in since the 1980’s. Seeing how the new rules fit into broader trends is part of how he can help you understand and comply with an ever-changing body of law.
Whether you are a U.S. Citizen or Resident, you will have specific reporting and disclosure requirements to the IRS on your income, from sources at home and abroad. In this article we will take a look at a few of the most common and most important international tax reporting requirements.
Requirement to Disclose Foreign Bank Accounts
If you have a financial interest or signatory power over a foreign financial account, then you are required to file a Report of Foreign Bank Account and Financial Accounts (FBAR), also known as FinCEN Form 114. This reporting obligation applies to bank accounts, brokerage accounts, mutual funds, trusts, or other financial accounts. http://americansabroad.org/issues/fbar/.
The FBAR form is an informational form that lists a taxpayer’s foreign accounts. Taxpayers who have an interest in accounts with an aggregate value exceeding $10,000 at any time during the calendar year are required to file an FBAR. The form covers of any of the following:
- foreign bank accounts
- investment accounts
- life insurance policies or annuities accounts.
- mutual funds
- retirement and pension accounts
- securities and brokerage accounts
- debit card and prepaid credit card accounts
Foreign Financial Institutions and Non-Financial Foreign Entities
The regulations require FFIs and other NFFEs to provide information about accounts and interests held by U.S. persons. Such entities may include banks, broker-dealers, clearing organizations, trust companies, custodial banks, and entities acting as custodians with respect to the assets of employee benefit plans.
As defined by the code, a financial institution must do one of the following: 1) “accepts deposits in the ordinary course of a banking or similar business”; 2) “holds financial assets for the account of others as a substantial portion of its business”; or 3) participates “primarily in the business of investing, reinvesting, or trading in” securities, partnerships, commodities, or interests of any of those items. The third category of financial entities includes hedge funds, private equity funds, venture capital funds, and mutual funds.
The Withholding Rules for Foreign Entities
Under the rules passed by Congress, taxpayers must withhold tax at 30% from most payments made to foreign entities by U.S. sources, including interest, dividends, and royalties. It also applies to items that might not normally be subject to U.S. tax, such as portfolio interest and capital gains of foreign interest. Essentially, if a foreign entity holds U.S. investments, it must provide information to the IRS about its U.S. clients, or pay a 30 percent withholding tax on those U.S. investments.
If an FFI wishes to escape the withholding requirement, it may do so only by entering into an agreement with the IRS under which it reports to the IRS information about accounts of U.S. persons. NFFEs can avoid paying the withholding tax by simply providing information to U.S. withholding agents about U.S. persons involved with the NFFE. Also, FFIs can agree to become qualified intermediaries (QIs), which requires the foreign entity to collect documentation from its clients sufficient to establish the client's’ status for the purposes of withholding. Under IRC §§ 1441 and 1442, persons and entities that make payments to foreign persons are required to withhold tax from items that come from U.S. sources, including dividends, interest, royalties, and other forms of fixed annual or periodic income.
Form 8939 Disclosure Requirements for U.S. Citizens and Residents
In addition to the FBAR requirement, U.S. Citizens and Residents also must report to the IRS the existence of specified financial assets with an aggregate value of over $50,000. These specified assets must be reported to the IRS using a Form 8939 attached to the individual tax return. [For more information se the IRS website: http://www.irs.gov/Businesses/Corporations/InformationforUSTaxpayers.]
The rules are nuanced, however. For example, for Form 8939, financial accounts held at foreign financial institutions are assets specified for reporting obligation, but accounts held at a foreign branch of a U.S. institution are not. A foreign financial account or asset for which you have signatory authority may not be under Form 8939, but it may trigger your requirement to file an FBAR form with the IRS. Foreign stocks and securities are assets specified for reporting obligation, as are foreign mutual funds, foreign partnership interests, foreign hedge funds, and foreign private equity funds. [For more information se the IRS website: a href=“http://www.irs.gov/Businesses/“>http://www.irs.gov/Businesses/
The penalties for non-compliance can be harsh: $10,000 if you are required to report foreign financial assets on Form 8938 but fail to do so, you may incur and up to $50,000 if you receive notification from the IRS about your failure to file the Form 8938 but you continue to fail to file the required form. Further, underpayments of tax attributable to undisclosed foreign financial assets will be subject to a substantial understatement penalty of 40 percent.
The Tax Lawyer Can Help You protect Your Financial Assets
If you are a U.S. Citizen or resident with foreign financial assets, you may have certain reporting and disclosure requirements to the IRS. In this situation, you may need the assistance of a knowledgeable tax attorney to help you evaluate all aspects of your situation.
The Tax Lawyer - William D. Hartsock has been successfully helping clients comply with U.S. International Tax Laws and deal with issues related to worldwide taxation since the early 1980s. Mr. Hartsock offers free consultations with the full benefit and protections of attorney client privilege to help people clearly understand their situation and options based on the circumstances of their case. To schedule your free consultation simply fill out the contact form found on this page, or call (858) 481-4844.