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FATCA Compliance Requirements

October 16, 2019

Back in 2010, former President Barack Obama signed into law the HIRE Act in an effort to accelerate recovery from the 2008 financial crisis. The HIRE act – short for Hiring Incentives to Restore Employment – endorsed the Foreign Account Tax Compliance Act (FATCA) at the time it was passed. FATCA is a highly significant tax law which imposes requirements on Americans who hold income in foreign bank accounts or financial institutions. FATCA is part of the general effort to stimulate the American economy and rebound from the financial crisis. The tax money generated by FATCA is used to fund certain economic programs conceived of by the Obama administration.

FATCA is one of those United States tax laws which can sneak up on unsuspecting taxpayers and end up causing them problems. Complying with this tax law can be stressful. Some taxpayers who have foreign accounts simply choose to ignore it, but non-compliance is a serious offense. Taxpayers who don’t comply can face severe penalties for doing so. In this post, we will go over the basic provisions of FATCA and then spell out the consequences what can follow for non-compliance. Then, we will discuss some of the current issues surrounding this piece of legislation.

Basic Provisions of the Law

The essential provisions of FATCA are relatively simple. U.S. citizens are required to file Form 8938 if they meet the information reporting thresholds imposed by FATCA. The reporting thresholds of FATCA vary depending on filing status, dwelling location, and type of assets held. For a comprehensive treatment of the reporting thresholds, taxpayers to the IRS summary on this topic.

A single filer who lives in the U.S. and has a minimum of $50,000 in a foreign financial institution, or FFI, must report this account on Form 8938. A single filer must also submit a Form 8938 if the value of their foreign financial assets go above $75,000 at any time during the year, regardless of whether they have minimum $50,000 at the end of the year. These thresholds double for married filers. Taxpayers living abroad have a reporting threshold of $200,000 at the end of the year if they be single. Single filers living abroad must submit Form 8938 if the value of their account goes above $300,000 at any point during the year. Both of these thresholds double for married filers.

FATCA also imposes reporting requirements on foreign financial institutions and non-financial foreign entities who have U.S. accounts. FATCA requires that the identities of U.S. account holders be disclosed to either the IRS or the FATCA governmental agency. FATCA imposes harsh penalties on foreign institutions or entities which fail to comply with its requirements.

Penalties for Non-Compliance

If a foreign financial institution or non-financial foreign entity fails to observe the requirements of FATCA, severe consequences can follow. The offending institution or entity will be shut out of the U.S. market, and the U.S. government will also impose a financial penalty of 30% on withholdable payments. To comply with FATCA, institutions and entities must reveal the identity of the U.S. citizen, account number, balance, deposits and withdrawals during the tax year.

Non-compliance of individuals and married filers can also trigger harsh penalties. If a taxpayer is required to file Form 8938 but fails to do so, this can lead to a $10,000 failure to file penalty. Additionally, the taxpayer may face another $50,000 fine for failing to respond to IRS notifications, plus a tax penalty of 40% on the value of the undisclosed taxable foreign assets. The primary purpose of FATCA is to crack down on tax evasion and generate income through taxable foreign assets. Many taxpayers forget that all income is reportable on their tax return, even if it is generated outside the U.S.

Ongoing Issues Related to FATCA

There are many ongoing issues related to FATCA and FATCA compliance. One of the biggest issues right now has to do with the burdens associated with compliance for institutions and entities. Complying with FATCA can be very costly for some institutions. Some banks, for instance, have complained that they face compliance costs in the range of tens of millions of dollars. This a very hefty burden. Many institutions have spent money trying to combat or overturn FATCA, given the heavy costs it imposes on them. Thus far, these efforts haven’t been successful.

Another issue is that complying with FATCA regulations does not exempt taxpayers from also filing an FBAR (Form 114). Form 114 is in addition to Form 8938. If you must file both, and fail to do so, you will face penalties even if one of the two forms was filed.

Finally, it’s important that taxpayers remember to withhold taxes on their foreign source income so that they don’t run afoul of IRS rules.

Get in Touch with MC&C Today

Complying with FATCA can be a bit complex, even if its basic purpose is relatively easy to understand. This is because taxpayers have to grapple with specific definitions for its many different terms and file a specific form. But, even though compliance isn’t easy, it is still necessary. Mackay, Caswell & Callahan, P.C., can be a valuable resource if you need answers regarding FATCA compliance. Our top tax attorneys can help walk you through its terminology and basic concepts. Given the heavy penalties which can follow from non-compliance, it’s best to receive expert counsel. Give us a call today and we can provide you with immediate assistance.

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