FATCA is Coming — Are You Ready?

IntroductionBrace yourselves. After years of anticipation, delay, controversy and refinement, several key provisions of the Foreign Account Tax Compliance Act (FATCA) are scheduled to go into effect in 2014. As details emerge, accountants, tax attorneys and corporate tax practitioners are recognizing the significant impact the act could have on their clients and companies. This white paper provides a broad overview of what to expect from FATCA and how CCH® can help tax professionals prepare for it so that they can successfully grow, manage and protect their businesses.

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What is FATCA?Originally passed as part of the Hiring Incentives to Restore Employment Act (HIRE) in 2010, FATCA gives the Internal Revenue Service (IRS) greater visibility into foreign accounts held by U.S. residents. It also arms the IRS with a big stick in the form of costly penalties to enforce tax compliance.

FATCA requires that taxpayers report foreign financial assets over a given threshold to the IRS. In addition, it requires foreign financial institutions (FFIs) — including banks, mutual fund and brokerage firms and life insurance companies — to enter into agreements with the IRS to avoid withholding on the payments it receives. Generally, under the agreements, foreign financial institutions are required to identify accounts held by U.S. taxpayers and report them to the IRS, whether the taxpayer resides in the U.S. or not. If foreign account holders don’t provide the required financial information to the IRS, the FFIs must automatically withhold a 30 percent tax on certain payments and account transfers.

To facilitate broad compliance worldwide, the U.S. has been actively negotiating Intergovernmental Agreements (IGAs) with more than 80 countries, making it easier for financial institutions in those countries to comply with the reporting requirements without running afoul of privacy laws. These agreements are structured differently, depending on the country, and are in various stages of being signed.

Who is Affected by FATCA?While FATCA is primarily designed to discourage wealthy individuals from moving income offshore to avoid taxes, the thresholds are low enough that the act could apply to millions of American taxpayers.

Under FATCA, specified foreign financial assets are broadly defined as financial accounts in an FFI, stock or securities issued by a non-U.S. entity, interest in a foreign entity and financial interests or contracts that have a non-U.S. issuer or counterparty. The act applies to single taxpayers living in the U.S. with foreign assets of $50,000 or more on the last day of the tax year or more than $75,000 at any time during the tax year. Those thresholds double for married taxpayers living in the U.S. and filing jointly. U.S. taxpayers living abroad and meeting additional requirements are required to report if they have $200,000 or more in assets on the last day of the tax year, or more than $300,000 at any time during the tax year. Again, the threshold doubles for married couples living abroad and filing jointly.

With such relatively low thresholds, it’s not difficult to see how a large number of Americans could end up getting snagged by the law. For example, an individual who inherited foreign assets and holds them outside the U.S. could find themselves in violation of FATCA if they fail to report those assets to the IRS. The same holds true for U.S. residents with foreign accounts living overseas but who don’t meet the specific residency requirements necessary to avoid FATCA reporting. The bottom line is that institutions and individual taxpayers will no longer be able to hide their assets offshore from the IRS — intentionally or not. Some Americans are going as far as to renounce their American citizenship to avoid complying with the act.

Failing to Comply with FATCA Could be CostlyIn response to growing client and corporate interest in FATCA, accountants, tax attorneys and corporate tax practitioners are scrambling to help them comply with the new act. Penalties are steep and failure to comply could prove costly. For example, FATCA requires taxpayers to report their financial assets on Form 8938 and file it with their tax return. Taxpayers failing to report foreign financial assets face a stiff penalty of $10,000 (and a penalty up to $50,000 for continued failure to report after IRS notification). In addition, underpayments of taxes due to nondisclosed foreign financial assets are subject to an additional penalty of 40 percent. Moreover, a payer that fails to withhold the 30 percent tax when required to do so will be liable for 100 percent of the amount not withheld, as well as related penalties and interest. That’s a powerful incentive.

Since there is more than one Model IGA and a phased global rollout with multiple deadlines, tax professionals can expect a high degree of complexity in ironing out the differences between each country, depending on where their clients or companies have foreign accounts.

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The CCH® FATCA Resource Center: A One-Stop, Up-to-Date FATCA Information SourceTo help tax professionals track and stay on top of all of the FATCA requirements and rapidly shifting landscape, CCH has introduced the CCH FATCA Resource Center — a one-stop information source for all things FATCA related. The CCH FATCA Resource Center provides the latest news, best practices, guidance and tools related to foreign accounts and compliance with the act. Because it’s continuously updated, tax professionals can rely on the fact that they have the most current and accurate information available on FATCA’s many moving parts.

The CCH FATCA Resource Center includes:

ll FATCA topics trending now.

ll FATCA-related news and developments from around the world.

ll Experts in the field providing guidance on compliance and reporting requirements.

ll FATCA primary sources, including code sections, regulations, rulings and cases.

ll U.S. Intergovernmental Agreements (IGAs) Smart Chart™.

ll FATCA calendar of important dates and deadlines.

ll NFFE planning tool.

ll FATCA forms and instructions.

ll FATCA/FBAR (Report of Foreign Bank and Financial Accounts)Comparison Chart (see below).

ll In-depth analysis of specific FATCA-related topics.

ll IRS and Treasury Comment Letters on FATCA-related issues in specific industries.

ll Foreign Bank Account Reporting Compliance Guide (with FATCA coverage) treatise by Melissa Gillespie.

ll Links to additional resources.

Given the newness, complexity and global reach of the law, tax professionals will want to walk their clients and companies through their unique situations. The following excerpt of the FBAR/FATCA Comparison Chart compares the requirements for Form 8938 and FBAR and is an example of the useful tools available to tax professionals with access to the CCH FATCA Resource Center.

FBAR/FATCA Comparison Chart, Comparison of Form 8938 and FBAR Requirements (Excerpt)The new Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file FBAR Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts). Individuals must file each form for which they meet the relevant reporting threshold.

Form 8938, Statement of Specified Foreign Financial Assets

Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR)

Who Must File? Specified individuals, which include U.S. citizens, resident aliens and certain nonresident aliens that have an interest in specified foreign financial assets and meet the reporting threshold.

U.S. persons, which include U.S. citizens, resident aliens, trusts, estates and domestic entities that have an interest in foreign financial accounts and meet the reporting threshold.

Does the United States include U.S. territories?

No Yes, resident aliens of U.S. territories and U.S. territory entities are subject to FBAR reporting.

Reporting Threshold (Total Value of Assets)

$50,000 on the last day of the tax year or $75,000 at any time during the tax year (higher threshold amounts apply to married individuals filing jointly and individuals living abroad).

$10,000 at any time during the calendar year.

When do you have an interest in an account or asset?

If any income, gains, losses, deductions, credits, gross proceeds or distributions from holding or disposing of the account or asset are or would be required to be reported, included or otherwise reflected on your income tax return.

Financial interest: You are the owner of record or holder of legal title; the owner of record or holder of legal title is your agent or representative; you have a sufficient interest in the entity that is the owner of record or holder of legal title.

Signature authority: You have authority to control the disposition of the assets in the account by direct communication with the financial institution maintaining the account.

See instructions for further details.

What is Reported? Maximum value of specified foreign financial assets, which include financial accounts with foreign financial institutions and certain other foreign non-account investment assets.

Maximum value of financial accounts maintained by a financial institution physically located in a foreign country.

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FATCA is definitely coming, and tax professionals will want to acquaint themselves with the requirements and timing of the law. For more information on the CCH FATCA Resource Center, as well as other CCH international tax solutions, including International Tax Treaty Expert Library and Global Transactions Library, please contact 888-CCH-REPS (888-224-7344).

Form 8938, Statement of Specified Foreign Financial Assets

Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR)

How are maximum account or asset values determined and reported?

Fair market value in U.S. dollars in accord with the Form 8938 instructions for each account and asset reported. Convert to U.S. dollars using the end of the taxable year exchange rate and report in U.S. dollars.

Use periodic account statements to determine the maximum value in the currency of the account.

Convert to U.S. dollars using the end of the calendar year exchange rate and report in U.S. dollars.

When Due? By due date, including extension, if any, for income tax return.

Received by June 30 (no extensions of time granted).

Where to File? File with income tax return pursuant to instructions for filing the return.

Mail to: Department of the Treasury Post Office Box 32621 Detroit, MI 48232-0621

For express, mail to: IRS Enterprise Computing Center ATTN: CTR Operations Mailroom, 4th Floor 985 Michigan Avenue Detroit, MI 48226

Certain individuals may file electronically at BSAE-Filing System.

Penalties Up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of a failure to disclose, for a potential maximum penalty of $60,000; criminal penalties may also apply.

If non-willful, up to $10,000; if willful, up to the greater of $100,000 or 50 percent of account balances; criminal penalties may also apply.