FATCA Grip Tightens as Treasury and IRS Set Sights on Overseas Assets

Advisors must step up client education efforts on foreign account tax compliance

By Deepa Venkatraghvan

Key Takeaways:

  • On January 17, 2013, the U.S. Department of the Treasury and the Internal Revenue Service issued comprehensive final regulations implementing the Foreign Account Tax Compliance Act (FATCA).
  • This marks a step forward in IRS efforts to target noncompliant U.S. taxpayers using foreign accounts.
  • In the past few years the IRS has given taxpayers several opportunities to come into compliance. As FATCA advances, these opportunities for compliance will diminish and taxpayers will face more severe consequences for delinquencies.
  • Advisors must step up their efforts to improve their clients’ compliance rate and educate them about the importance of proper disclosures.

On January 17, 2013, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) issued comprehensive final regulations implementing the information reporting and withholding tax provisions commonly known as the Foreign Account Tax Compliance Act (FATCA). Enacted by Congress in 2010, these provisions target acts of noncompliance by U.S. taxpayers using foreign accounts. The issuance of the final regulations marks a key step in establishing the IRS’ approach to combating tax evasion. And for advisors, this only means more client education and ultimately compliance.

How does FATCA work?

FATCA takes a two-pronged approach. First, it places the onus on U.S. taxpayers holding financial assets outside the United States to report those assets to the IRS. This reporting requirement was introduced in 2012 with Form 8938—Statement of Specified Foreign Financial Assets—and requires U.S. taxpayers with specified foreign financial assets that exceed certain thresholds to file this form along with their federal income tax returns.

The second approach, which is currently in implementation and expected to be in place by 2014, is to place the onus on foreign financial institutions to report, directly to the IRS, information about financial accounts held by U.S. taxpayers or accounts held by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

Form 8938 has already been implemented and much has been written about it. So let’s not get into the details. Let’s look at the second FATCA approach and how it will impact your clients.

FATCA information for foreign financial institutions

Under FATCA, foreign financial institutions (FFIs) must agree to report certain information to the IRS about their U.S. accounts or accounts of certain foreign entities with substantial U.S. ownership. If they fail to enter such agreement, they will face withholding of up to 30 percent on certain U.S.-sourced income.

In July of this year, the IRS is expected to open the registration portal for FFIs. The IRS will then issue Global Intermediary Identification Numbers (GIINs) to each of the “participating” FFIs and subsequently publish this list so that withholding agents may have that information.

Among other things, FFIs will agree to share the following information with the IRS on their U.S. accounts:

  • The name, address and taxpayer identifying number (TIN) of each account holder who is a specified U.S. person
  • The account number
  • The account balance or value
  • The gross receipts and gross withdrawals or payments from the account

If any account holder does not share sufficient information with the FFI, such as sufficient proof of status of residence, then the FFI will deduct a 30 percent tax on any U.S. source withholdable and pass-through payments that this account holder (referred to as a “recalcitrant” account holder) may receive. One of the purposes of requiring withholding on pass-through payments is to permit an FFI that has entered into an FFI agreement to continue to remain in compliance with its agreement, even if some of its account holders have failed to provide the FFI with the information necessary for the FFI to properly determine whether the accounts are U.S. accounts and perform the required reporting.

Now, instead of reporting to the IRS directly, some FFIs can report FATCA data to their own governments that agree to share it with the IRS. The U.S. Treasury Department has already concluded bilateral agreements with the United Kingdom, Italy, Mexico, Denmark, Ireland, Switzerland and Spain.

FATCA timelines

Timelines on FATCA have been a moving target because the IRS is in a continuous process of revising the various rules and requirements. But if one were to put together a broad blueprint, here’s what it would look like:

July 2013

IRS to open registration portal for FFIs

October 2013

IRS to start issuing GIINs

December 2013

IRS to publish first list of participating FFIs

January 2014

Withholding on fixed, determinable, annual, periodic income to begin

March 2015

FFIs to begin filing information report on U.S. account balance reporting

January 2016

Deadline for FFIs to become participating FFIs

January 2017

Withholding on gross proceeds payments to nonparticipating FFIs and recalcitrant payees begins

Source: Deloitte.com

What’s in it for your clients?

With FATCA, the IRS is really leaving no stone unturned when it comes to ensuring compliance from its taxpayers on foreign income and assets. By placing the onus on financial institutions in addition to individual taxpayers, the IRS is making sure it gets information from all sources possible. The good thing is that the pace of implementation has not really picked up steam.

Right now, along with FATCA implementation, the IRS is also providing taxpayers with various means to become compliant. This includes the ongoing Offshore Voluntary Disclosure Program. Experts believe that once FATCA is fully implemented, such opportunities will fade away.

Your clients must therefore evaluate their situation and decide if they must use these windows of opportunity now or be left with fewer choices later on. As advisors, you must be ready to ensure your clients’ compliance and to educate them to make the right choices.

DISCLAIMER: The views expressed in this article do not necessarily express the views of Elite Advisor Report or CEG Worldwide, LLC, and should not be construed as professional tax advice.

About the Author

Deepa Venkatraghvan, a Chartered Accountant (CPA) from India, is a financial journalist. Currently, she writes for India’s leading publication, www.economictimes.com on tax and financial matters impacting Indians living outside India. You can read her blog on personal finance – Money Happy Returns or follow her articles on Twitter.