FATCA: Compliance And Enforcement

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FATCA is the Foreign Account Taxpayers Compliance Act. On Feb. 8th, 2012, the IRS and the Treasury Department proposed tax regulations under FATCA and a statement regarding a new intergovernmental approach with 5 trading partners of the United States to improve international tax compliance and tax implementation of the FATCA. The new upcoming new regulations are a highly dynamic issue with IRS officials and foreign governments frequently commenting.

Key Provisions

Certain United States taxpayers who hold financial assets in a country other than the US must now report those assets directly to the Internal Revenue Service under FATCA. Additionally, foreign financial institutions will be required to report to the Internal Revenue Service information about certain financial accounts that are held by United States taxpayers.

  1. United States Taxpayer Reporting When Holding Foreign Financial Assets

US taxpayers who hold foreign financial assets with a value that exceeds $50,000 will be required to report information about the assets on Form 8938 and attach it to their annual IRS tax return. The reporting applies to assets that were held during taxable years beginning Mar. 18, 2010. The majority of taxpayers, they will start reporting on the tax return for 2011. There is a $10,000 penalty if they fail to report their foreign financial assets on IRS Form 8938. The penalty can increase to $50,000 if they still do not report after they receive a notification from the IRS. Tax underpayments that are attributable to foreign financial assets that are non-disclosed are subject to the 40% understatement penalty.

  1. Foreign Financial Institution Reporting

Foreign financial institutions, also known as FFIs, will now be required to directly report information about US taxpayer accounts to the IRS. They will also have to report accounts that are held by foreign entities that US taxpayers hold a substantial interest in ownership. FFIs will need to enter an agreement with the Internal Revenue Service by June 30th, 2013. The participating FFIs will have an obligation to 1. Perform due diligence and identification procedures with their account holders; 2. Annually report US taxpayers or other foreign entities that have a substantial United States ownership to the IRS; 3. Withhold 30% of payments from income sourced in the United States and pay it to the IRS, in addition to securities sales that generate income sourced in the United States made to other FFIs that are not participating, foreign entity account holders that have failed to provide enough information about substantial United States owners and individual account holders that failed to provide enough information to show whether they are a person from the United States or not.

The FATCA will significantly impact United States financial institutions, the United States withholding agents, foreign entities that are non-financial, foreign financial institutions and the United States, taxpayers.


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