On July 1, 2014, the Foreign Account Tax Compliance Act went into effect. The measure was passed in 2010 as part of the Hiring Incentives to Restore Employment Act. FATCA has been billed as a way to curb the use of unreported foreign accounts to avoid U.S. tax liabilities.
Leading up to implementation of the Act, the Treasury reached information-sharing agreements with many countries. In addition, almost 77,000 banks have registered with the Internal Revenue Service and agreed to share information on their U.S. account holders.
What does implementation of the Act mean for those who have a foreign bank or investment account?
As discussed in a recent post, U.S. persons need to report foreign bank accounts (when they contain over $10,000) to the IRS even if they owe no tax. The U.S. government can tax earnings of citizens and green card holders regardless of where they live. Failing to disclose an account on a Report of Foreign Bank and Financial Accounts (FBAR) can lead to serious penalties and even criminal prosecution.
The reporting requirement extends to those with a substantial connection to the country as well. Unfortunately, no one knows exactly what that means. This is part of the problem with the new law; no one knows exactly how the IRS will enforce it and some terms lack clear definitions.
Under the new law, banks that do not report on American account holders can face a 30 percent withholding tax. Some foreign financial institutions may find it is easier to stop accepting American customers than comply with the new regulations. This could may it harder for Americans living abroad to obtain financial services.
As the Act goes into effect, those with foreign accounts should speak with a tax attorney. A limited amnesty may allow a taxpayer to come into compliance and avoid some IRS penalties.
Source: The Economist, “FATCA’s flaws,” June 28, 2014.