Foreign Account Tax Compliance Act (FATCA)
The Foreign Account Tax Compliance Act (FATCA) is intended to increase U.S. tax compliance and prevent tax evasion via non-US financial accounts of both resident and non-resident US citizens. By attempting to prevent tax evasion Congress can essentially increase tax revenues without having to increase taxes.
FATCA contains two reporting obligations for U.S. Individuals and for foreign financial institutions (FFIs). These reporting obligations are discussed below.
Reporting Obligations for U.S. Individuals
Any U.S. individual who holds interest in specified foreign assets whose aggregate value exceeds the thresholds listed below must file form 8938 with their US tax return. The most common type of specified foreign asset would be Canadian bank and investment accounts. Essentially, a U.S. individual is someone who is a U.S. citizen or an individual who is considered a resident alien. For a more detailed definition of a U.S. individual and specified foreign assets please see the instructions for form 8938 (http://www.irs.gov/pub/irs-pdf/i8938.pdf.)
The thresholds are as follows:
If you are a U.S. individual living abroad you are required to file an 8938 if:
- You are single or married filing separately and the total value of your specified foreign assets is more than $200,000 at the end of the year or more than $300,000 at any time during the year.
- You are married filing jointly and the total value of your specified foreign assets is more than $400,000 at the end of the year or more than $600,000 at any time during the year.
If you are a U.S. individual living in the U.S. you are required to file an 8938 if:
- You are single or married filing separately and the total value of your specified foreign assets is more than $50,000 at the end of the year or more than $75,000 at any time during the year.
- You are married filing jointly and the total value of your specified foreign assets is more than $100,000 at the end of the year or more than $150,000 at any time during the year.
- You are married filing separately and the total value of your specified foreign assets is more than $50,000 at the end of the year or more than $75,000 at any time during the year.
Given these thresholds, a significant number of U.S. individuals living in Canada can expect to be required to file from 8938 once they calculate the aggregate totals of their Canadian bank accounts, investment accounts and RRSPs.
Reporting Obligations for Foreign Financial Institutions
The reporting obligations for FFIs is the most significant area of change and is the one that will have the largest effect on U.S. citizens living abroad as FATCA essentially extends the scope of the IRS to be able to access information from banks outside of the U.S. The IRS is able to do this by requiring FFIs to enter into an agreement with the IRS requiring the FFI to become a participating FFI or be subject to strict liability standards and be required to withhold and pay 30% of any U.S. source income to the IRS. To become a participating FFI, the FFI will have to agree to comply with certain mandated procedures.
For this article I will focus on what a participating FFI will be required to disclose regarding individuals personal accounts and how it can affect U.S. individuals and U.S. citizens living abroad.
Participating FFIs will be required to electronically review pre-existing individual accounts with values in excess of $50,000 for any indication that the account holder has U.S. status such as a U.S. birthplace, a U.S. address, etc. For accounts in excess of $1 million, a review of the electronic information as well as an inquiry with a representative of the bank who has contact with the individual account whether or not they are aware if the account holder is a U.S. citizen.
For new individual accounts opened after the effective date of the FFI’s agreement with the IRS, the FFI will be required to review the information when the account is opened for any indication that the individual is a U.S. citizen.
By requiring FFIs to disclose any U.S. individuals that have accounts at their institutions the IRS will be able to identify U.S. taxpayers that are not compliant with their U.S. filing obligations. As a result, U.S. taxpayers are encouraged to become compliant with their U.S. filing requirements and take advantage of the new streamlined filing procedures that the IRS announced in June 2012 to avoid being caught under FATCA.
If you would like to discuss how FATCA may impact you, please contact one of our qualified professionals.
Rob Brown, CA
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