2010 FATCA Legislation Changes the Playing Field for Americans Abroad
The Foreign Account Tax Compliance Tax Act (FATCA) became law in 2010 and is a major development in the taxation of Americans living abroad. FATCA is designed to increase compliance by US taxpayers with reporting requirements for foreign financial accounts. The legislation is expansive and affects both taxpayers and foreign financial institutions that provide financial services to US persons (U.S. citizens and U.S. permanent residents).
Key elements of the FATCA law include more onerous reporting requirements and higher penalties. Most significantly, however, are the reporting demands placed on global financial institutions that will result in a high degree of transparency for the IRS to see non-U.S. assets and transactions of Americans.
Specifics details of FATCA that affect Americans Abroad include:
- In addition to the current Report of Foreign Bank and Financial Accounts (FBAR) reporting requirement whereby American citizens are required to report to the U.S. Department of Treasury any foreign financial assets worth more than $10,000, FATCA requires Americans to separately report foreign holdings exceeding $50,000 to the IRS on Form 8938 (the reporting threshold is $300,000 for US taxable person not resident in the US). Both reporting requirements are triggered if assets exceed these amounts at any point in the year.
- The new IRS reporting requirements include detailed information about account holdings and transactions. Penalties for failure to file the FBAR or form 8938 start at $10,000 but can go much higher depending on account size and circumstances.
- All non-U.S. financial institutions will be required to make detailed reports to the IRS on accounts owned by U.S. persons, or be subject to a 30% withholding on all U.S. sourced payments. The implication of this provision is that non-U.S. financial institutions will either refuse to service U.S. citizens or they will comply with the strict mandatory IRS reporting requirements.
- Any U.S. Person who owns Passive Foreign Investment Companies (PFICs) must now report the onerous form 8621 on each separate PFIC investment every year (previously required only in years when distributions from PFIC were made).
- The statute of limitations for IRS audit is extended from 3 years to 6 years in cases where more than $5,000 is omitted from gross income and the sum is attributable to foreign assets.
FATCA Legislation Changes the Playing Field for Americans Abroad
The full force of FATCA will come into force in stages through 2017. Foreign financial institutions have had mandatory reporting requirements since 2014. In addition to the measures relating to the implementation of the FATCA law, the IRS has significantly expanded its enforcement activity with respect to assets held by U.S. taxable persons outside of the United States. The new FATCA compliance and reporting environment fundamentally changes the investment and financial planning game for Americans abroad.
Americans with financial assets outside the US must assume the IRS has full transparency to see these assets because of FATCA. Many of the special rules that apply to foreign assets that for decades could be conveniently ignore must now be given full attention. Failure to understand and comply with these rules may result in very substantial penalties, back taxes, interests and attorney’s fees.
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