The IRS has over the last few years strengthened implementation of reporting requirements for foreign financial assets held by US citizens/residents. While the FBAR (Foreign Bank Account Reporting) rule has been in force since 1972, FATCA (Foreign Account Tax Compliance Act) was enacted in 2010 to enforce United States Persons living in the US and abroad to file yearly information reports on non-US financial accounts to FINCEN – Financial Crimes Enforcement Network.
Who is required to report under FATCA?
The measure is two-fold in the sense that it applies to individuals as well as foreign financial institutions. The FATCA is part of the Hiring Incentives to Restore Employment (HIRE) Act and was enacted as Subtitle A (sections 501 through 541) of Title V of that law.
How to report FATCA and what forms to submit?
FATCA requires individuals (US citizens & residents, broadly speaking), who own certain foreign financial accounts or other offshore assets to report these assets on form 8938. This form must be attached to the income tax return (usually form 1040). Taxpayers whose foreign financial assets are below a certain threshold do not have to file Form 8938.The threshold limits are higher for individuals who live outside the United States and different for married and single taxpayers. Taxpayers who do not have a requirement to file an income tax return for the tax year do not have to file Form 8938, irrespective of the value of their specified foreign financial assets
The reporting requirement for Form 8938 is different from the FBAR reporting requirement (Also called Fin CEN Form 114). An individual may need to file both forms and separate penalties may apply for failure to file either form.
Do foreign financial institution (FFI) have to report FATCA?
Foreign financial institutions also have certain obligations under FATCA. FFI’s (Foreign Financial Institutions) need to register with the IRS and agree to report to the IRS certain information about their U.S. accounts. They also need to report accounts of certain foreign entities with substantial U.S. owners. Absent of any exemption, FFI’s that do not both register and agree to report, face a 30% withholding tax on certain U.S source payments made to them.
What is FATCA Intergovernmental Agreement?
In case a government/jurisdiction enters into an Intergovernmental Agreement (IGA) to implement FATCA, the reporting and other compliance burdens on the financial institutions in the jurisdiction are different and simpler. Under the IGA’s, each financial institution will send the data of U.S.-person’s data to the local government first and the government will forward it onwards to the US government/IRS. For example, according to India’s IGA, the data of an American citizen will be sent to U.S. via the Indian government. However, in the case of a non-IGA country, (Ex: North Korea), only the bank will store the U.S.-person data and will send it directly to the IRS. FATCA is used by government personnel for cross-checking. Eventually, as a third party (FII/Foreign Jurisdiction) also submits the information to the IRS, any non-reporting also comes to light.
Under U.S. tax law, U.S. persons are generally required to report and pay U.S. federal income tax on income from all/global sources. Needless to say, FATCA compliance has now become a major part of reporting required along with tax return filing and must therefore be included on all tax organizers as applicable.