Revenue Enhancing Legislation: FATCA or Fiction

The U.S. Foreign Account Tax Compliance Act (FATCA) is designed to stop the flow of money from the United States into untaxed offshore accounts and raise revenue by collecting unreported earnings. But, while FATCA takes a giant step in closing the loophole through which tax evaders slide, the feasibility of implementing the law and enforcing it on foreign financial institutions (FFI) could be problematic for the United States. Foreign governments, banking associations, both in the U.S. and abroad, and various corporate entities have criticized the Act as being cost prohibitive. Financial industry pundits also question the real return on investment for the U.S. once the cost of enforcement is calculated along with tax dollars gained. One thing is certain though, like it or not, FATCA has arrived.

The Facts on FATCA

The regulation sets new reporting rules for U.S. taxpayers both at home and abroad. Though it is a U.S. law, FATCA also imposes compliance regulations on foreign financial intuitions (FFIs), which have stirred up global denunciations. FATCA, signed into law in March 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, is being implemented in stages. The first phase, which covers filing requirements for U.S. taxpayers, is effective with 2011 tax returns. The second phase detailing obligations for foreign financial institutions becomes effective in January 2013.

In a July 14, 2011, press release, the Internal Revenue Service outlined reasons for the phased approach. "FATCA is an important development in U.S. efforts to combat offshore noncompliance. At the same time, the IRS recognizes that implementing FATCA is a major undertaking for financial institutions," according to IRS commissioner Doug Shulman in the release. "Today's notice is a reflection of our serious commitment to implementation of the statute, but also a serious commitment to listen to the implementation challenges of affected financial institutions and make appropriate adjustments to ensure a smooth and timely roll-out."

Requirements for U.S. Taxpayers

Under FATCA, a U.S. taxpayer must file new tax form 8938 along with his 2011 tax return if his foreign financial assets have an aggregate value exceeding $50,000. Failure to report these foreign assets carries a $10,000 fine and a penalty of up to $50,000 for continued failure to file. The IRS can also levy a 40 percent penalty for understatement of taxes due to the non-disclosure of foreign assets.

On December 11, 2011, the IRS released additional guidelines to clarify the filing rules for married couples and for U.S. taxpayers who live abroad. The guidelines state that Form 8938 is required when "the total value of specified foreign assets exceeds certain thresholds. For example, a married couple living in the U.S. and filing a joint tax return would not file Form 8938 unless their total specified foreign assets exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year." Under the guidelines, the thresholds for taxpayers who reside abroad are higher. The same married couple living abroad and filing a joint return would not need to file Form 8938 "unless the value of specified foreign assets exceeds $400,000 on the last day of the tax year or more than $600,000 at any time during the year," according to the IRS guidelines.

Requirements for Foreign Financial Institutions

FATCA sets strict compliance and reporting requirements for FFIs. Under the law, FFIs must perform due diligence on customers and report information directly to the IRS. FFIs must:

  • Obtain identification for and perform due diligence on all U.S. accountholders.
  • Enter into an agreement with the IRS by June 2013 to report annually to the IRS on U.S. accountholders and foreign entities with substantial U.S. ownership.
  • Begin reporting to the IRS in 2014.

In its summary of the Act's key provisions, the IRS states that's that FFIs also must withhold and pay to the IRS 30 percent of:

  • Any payment of U.S.-source income;
  • Gross proceeds from the sale of securities that generate U.S.-source income that are made to: a non-participating FFI; individual accountholders who will not provide information to determine if they are a U.S. citizen; or to a foreign entity accountholder who will not provide information on its substantial U.S. owners.

A non-participating FFI is one that fails to enter into an agreement with the IRS. The Act details provisions for the withholding of U.S. source dividends, the sale of U.S. securities, and pass through payments for non-participating FFIs beginning on January 1, 2014.

International Concern

FATCA has raised concerns among FFIs across the globe regarding the cost and compliance burden of identifying U.S. accountholders, performing specific due diligence and reporting on them annually. Some argue the law violates their national borders and sovereign laws. In a December 22, 2011, letter to the IRS and the U.S. Department of State, the Brazilian Federation of Banks stated that FATCA "clashes with certain aspects of the Brazilian Federal Constitution." Even the U.S. Congress has voiced opposition. On March 2, 2011, the Florida Delegation of the U.S. House Representatives sent a letter to President Obama calling for the withdrawal of FATCA.

One of the most strident calls for elimination of FATCA came in an August 31, 2011 letter to the secretary of the treasury, the commissioner of the IRS, deputy assistant secretary of International Tax Affairs and the Associate Chief Counsel (International) of the IRS, from the American Citizens Abroad (ACA). In the letter ACA states," "the FATCA requirement that 10 percent U.S. ownership in a foreign non-listed company or partnership be reported to the IRS is shutting Americans out of partnerships and joint ventures with foreigners overseas. This will greatly handicap export development programs of small- and medium-sized companies as well as entrepreneurial activities of Americans on the worldwide scene. FATCA has already turned private American citizens residing overseas into pariahs in the international financial world."

What You Can Do

  • Get started now by identifying the greatest risks for your organization. While FFIs face the greatest challenges, U.S. based financial intuitions also need to evaluate their business, especially in the area of pass-through payments.
  • Evaluate your business accounts to determine if you have adequate information about their ownership to determine if they fall under FATCA reporting requirements. If you don't know, start gathering information now.
  • Set up a checklist and establish a timeline that will take you through full implementation of FATCA.
  • Communicate with your customers so that they understand the provisions of the new law that may apply to them.
  • Talk to associations in your business line and also work closely with the legal department in your company. The cost of non-compliance with FATCA can be very expensive, but some countries have raised the concern that for some FFIs complying with FATCA could result in penalties within their own countries.

The Bottom Line

Most of those who have commented on the new law agree that plugging holes in tax legislation is a laudable goal. But the debate whether FATCA is the right plug continues to rage. FATCA is here, but how successful it will be remains to be seen.

Debbie Hitzeroth, CAMS, BSA/OFAC compliance officer, United States Postal Service, Washington, D.C., USA,

Leave a Reply