FATCA Provisions

Banker Resource
September 19, 2012 — 1,170 views  
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The Foreign Account Tax Compliant Act (FATCA) was enacted as part of the Hiring Incentives to Restore Employment Act (HIRE) in 2010. FATCA was designed to combat tax evasion through offshore investment accounts. 

The provisions of FATCA call for most U.S. taxpayers with foreign financial assets to report those assets to the Internal Revenue Service (IRS). In addition, foreign financial institutions (FFIs) providing accounts to U.S. taxpayers or foreign companies with substantial ownership by U.S. taxpayers are required to disclose information about those accounts to the IRS. 

Reporting Requirements for U.S. Taxpayers

U.S. taxpayers who hold foreign financial assets totaling over $50,000 are required to report those assets on their U.S. tax returns via Form 8938. This reporting requirement began for most taxpayers in the 2012 tax season. Anyone who is required to report but fails to do so is subject to an initial penalty of $10,000, and penalties of up to $50,000 may result for those who fail to report after having been issued an IRS notice. In addition, tax underpayments attributed to unreported foreign assets are subject to a 40 percent penalty. 

Reporting Requirements for Foreign Financial Institutions

FFIs with accounts held by U.S. taxpayers or foreign entities with substantial ownership by U.S. taxpayers are asked to comply with FATCA before June 30, 2013, by entering into a special agreement with the IRS. The agreement will obligate FFIs to take the following actions:

• Due diligence must be used by FFIs in establishing accountholder identity and in other procedures regarding accountholders.
• Annual reports are to be made to the IRS of all accounts held by U.S. residents, U.S. citizens and foreign entities with substantial U.S. ownership.
• FFIs must withhold and pay to the IRS 30 percent of any money sourced from U.S. income that is paid to non-participating FFIs, accountholders who cannot be identified as U.S. persons because of a lack of information or foreign-entity accountholders who have failed to identify substantial U.S. owners. 

New FATCA Regulations Proposed

On February 8, 2012, the IRS and Department of the Treasury proposed 388 pages of regulations regarding FATCA. Among these regulations are the following:

• Payments outstanding as of January 1, 2013, including all revolving lines of credit, are considered grandfathered obligations and are not subject to withholding.
• In 2014 and 2015, FFIs are only required to report the account number, balance, name, address and taxpayer identification number (TIN) of U.S. accountholders. Additional reporting requirements will be phased in for the 2016 and 2017 reporting years.
• FATCA reporting requirements may be enforced by foreign governments who have agreed to an intergovernmental automatic information exchange.

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