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Foreign Account Tax Compliance Act (FATCA)

The Foreign Account Tax Compliance Act (FATCA), enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, is an important development in U.S. efforts to combat tax evasion by U.S. persons holding investments in offshore accounts.

Under FATCA, certain U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS.

In addition, FATCA will require 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.

FATCA requires certain U.S. taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 to report certain information about those assets on a new form (Form 8938) that must be attached to the taxpayer’s annual tax return.

Reporting applies for assets held in taxable years beginning after March 18, 2010. For most taxpayers this will be the 2011 tax return they file during the 2012 tax filing season.

Failure to report foreign financial assets on Form 8938 will 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 percent.

FATCA will also require foreign financial institutions (“FFIs”) 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 with these new reporting requirements, an FFI will have to enter into a special agreement with the IRS by July 1, 2014.

Under this agreement a “participating” FFI will be obligated to:

  1. undertake certain identification and due diligence procedures with respect to its account-holders
  2. report annually to the IRS on its accountholders who are U.S. persons or foreign entities with substantial U.S. ownership; and
  3. withhold and pay over to the IRS 30-percent 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 FFIs, (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.

Here are  names of countries that have entered into an agreement with the US:

Look-back period

The US authorities have indicated that once they receive disclosure from a foreign financial institution with respect to its US account holders, they will review all accounts back to August 1, 2008, including the closed ones.

Therefore, closing an account in a foreign financial institution and transferring it to another one or to another country may not be a proper remedy for FATCA or FBAR.

 

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