• Name, address and taxpayer identification number (TIN) of each account holder who’s a U.S. person (or, in the case of an account holder that is a U.S.-owned foreign entity, the name, address and TIN of each U.S. person who’s a substantial U.S. owner of the entity),
• Account number,
• Account balance or value, and
• Gross receipts and gross withdrawals or payments from the account.
The term “U.S. persons” includes citizens, residents and entities created or organized in the United States or under the laws of the United States, as well as estates formed under those laws. Foreign trusts are considered U.S. persons to the extent that the U.S. person or persons control “substantial decisions” of the trust.
Since the passage of FATCA, many FFIs expressed concern about the potential compliance burdens. The proposed regulations — which detail a step-by-step process for U.S. account identification, information reporting and tax withholding — appear to have incorporated some of these FFIs’ suggestions for easing the burdens.
The proposed regulations require an FFI to enter into an agreement with the IRS to:
• Identify U.S. accounts,
• Report certain information to the IRS regarding U.S. accounts,
• Verify its compliance with its obligations under the agreement, and
• Withhold a 30% tax on certain payments related to U.S. investments and made to FFIs and account holders who won’t provide the required information.
The proposed regulations would also:
Reduce the administrative burden of identifying U.S. accounts. The regulations base the required degree of due diligence for an account on its value and risk profile. They also, in many cases, allow FFIs to rely on information the institutions already collect, such as that obtained during customer intake procedures to comply with their anti–money-laundering obligations.
Expand the categories of “deemed-compliant.” Certain categories of FFIs are deemed to comply with FATCA without entering into an agreement with the IRS. The expansion is intended to focus the application of FATCA’s requirements on financial institutions that provide services to the global investment community.
Phase in reporting and withholding obligations over an extended transition period, culminating in 2017. Under the proposed regs, FFIs would have to report the identities, account balances and other information on U.S. accounts in 2014 and 2015 (for the 2013 and 2014 calendar years). Beginning in 2016 (for 2015), FFIs must also report income associated with U.S. accounts. By 2017 (for 2016), FFIs would have to supply full reports, including gross proceeds from broker transactions.
Cross-border regulatory systems
One of the primary concerns expressed by FFIs before the release of the proposed regs involved the role of local secrecy laws. Some FFIs worried that providing the information required by FATCA directly to the IRS would necessarily require violations of their local banking secrecy laws.
To prevent such issues, the Treasury Department and the IRS issued a joint statement with several other governments on the same day the proposed regs were released. The statement — joined by the governments of France, Germany, Italy, Spain and the United Kingdom — outlines a cross-border regulatory system.
Under the system, FFIs will report the required information to their respective governments, which will then share the information with the IRS pursuant to existing bilateral income tax treaties. This framework will serve as a model for future agreements between the United States and other countries. That means more FFIs will be reporting information on U.S.-held accounts in the future.
Self-reporting by U.S. taxpayers
FATCA requires certain U.S. taxpayers holding foreign financial assets with an aggregate value that exceeds $50,000 to report certain information about those assets on Form 8938, along with their annual tax returns, beginning with the 2011 tax year. As FFIs increasingly report the information, the likelihood of being tripped up by neglecting to file Form 8938 will become greater, as will the likelihood of incurring a costly penalty.
Failure to report foreign financial assets on Form 8938 will result in a penalty of $10,000, with an additional penalty of up to $50,000 for continued failure to file after receiving IRS notification to file. A 40% penalty on any understatement of tax attributable to nondisclosed foreign financial assets can also be imposed.
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.
The FBAR must be received by the IRS on or before June 30 of the year following the calendar year being reported.
Are you in compliance?
If you hold offshore financial accounts, it’s increasingly critical that you properly report them to the IRS. The proposed FATCA regulations will bring an increased level of scrutiny of your foreign assets. To ensure you’re in compliance, or if you have questions regarding FATCA regulations, please give us a call.