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Are You In FATCA Compliance?
The Foreign Account Tax Compliance Act was enacted by Congress in 2010 as part of the Recruiting Incentives to Restore Jobs (HIRE) Act to combat tax evasion by US persons holding investments in offshore accounts. The United States Department of the Treasury and the IRS are continuing to develop guidelines regarding FATCA. The law generally requires foreign financial institutions to report certain information about certain financial accounts held by US taxpayers or by foreign entities in which US taxpayers have a large ownership interest and pay the taxes they owe.
FATCA generally requires the reporting of foreign financial assets, including some as common as financial accounts held at foreign financial institutions. Stocks or foreign securities that are not held in a financial account. Foreign partnership interests and mutual funds. Some that are less commonly reported are, for example, investment assets held by foreign or domestic grantmaking trusts where you are the grantor. A foreign life insurance or annuity contract with a cash value. Foreign hedge funds and foreign private equity funds.
US law treats US persons and foreigners differently for tax purposes. US citizen refers to individuals born in the United States, Puerto Rico, Guam, the US Virgin Islands. Individuals born in American Samoa or born in the Commonwealth of the Northern Mariana Islands who have chosen to be treated as US citizens. The Child Citizenship Act, applicable to adopted and biological children of US citizens, provides for the automatic acquisition of US citizenship upon meeting certain conditions. A foreigner is any individual who is not a US citizen or a US citizen, you are considered a nonresident alien unless you meet one of two tests. You are a foreign resident of the United States for tax purposes if you meet the green card test or substantial attendance test for the calendar year (January 1-December 31). You are a resident, for US federal tax purposes, if you are a Legal Permanent Resident in the United States at any time during the calendar year. This is known as the “green card” test. To meet a United States resident for the tax purposes test, you must be physically present in the United States (US) at least:
1) 31 days during the current year and
2) 183 days over a 3 year period covering the current year and the previous two years.
Under FATCA, US taxpayers who hold financial assets outside the United States must report those assets to the IRS. This is in addition to the old requirement to report with tax returns known as FinCEN Form 114 Statements of Foreign Banks and Financial Accounts known as FBAR. FATCA requires foreign financial institutions to report directly to the IRS information about financial accounts held by US taxpayers or foreign entities in which the US taxpayer has a substantial interest. Reporting agencies include not only banks, but also other financial institutions such as investment entities, brokers and certain insurance companies. Some foreign non-financial entities must also report their owners in the US. We can see that’s why when someone tries to create a new account with a foreign financial institution, they ask for information about nationality.
FATCA requires US taxpayers who have foreign financial assets with an aggregate value of more than a reporting threshold (at least $50,000) to report information about those assets on Form 8938 along with their tax returns. Reporting thresholds vary based on whether you file a joint income tax return or live abroad. If you are single or filing separately from your spouse, you must submit Form 8938 if you have more than $200,000 in foreign financial assets at the end of the year and you live abroad or more than $50,000, if you live in the United States. U.S. citizens whose tax residence is in a foreign country and who have been in the foreign country or countries for at least 330 days in any consecutive 12-month period are considered to live abroad. When you file a tax return jointly married and living abroad, an individual must file Form 8938 when the total value of the foreign financial assets is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year. This threshold applies even if only one spouse lives abroad. If you are single then the total value of financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time of the year.
A person must file Form 8938 if you are filing as a single amount and your total foreign financial assets are more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. In the case of filing a tax return as a joint filing, the total value of the foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year. If you are filing as a separate registrar the total value of foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. When calculating the value of a foreign financial asset, the threshold, include half of the value of a certain foreign financial asset jointly owned by your spouse. But for reporting purposes, all values must be reported on form 8938.
Foreign Financial Assets:
Foreign financial assets include foreign financial accounts and foreign non-account assets held for investment (as opposed to held for use in trade or business), such as foreign stock and securities, foreign financial instruments, contracts with non-US persons, and interests in entities foreign. This must be reported.
Foreign currency is not a defined foreign financial asset. Foreign real estate is not a defined foreign financial asset when used as a personal residence or rental property. If real estate is owned through a foreign entity, interests in that entity must be reported if the total value of all foreign financial assets determined is greater than the reporting thresholds applied. Directly owned tangible assets, such as art, antiques, jewelry, cars and other collectibles, are not designated foreign financial assets. Directly owned precious metals, such as gold, are not designated as foreign financial assets. However, gold certificates issued by foreigners may be foreign financial assets and need to be reported against reporting thresholds.
You do not need to report assets if the financial account is managed by a US payer. US payers include US branches of foreign financial institutions, foreign branches of US financial institutions, and certain foreign subsidiaries of US companies. Therefore, financial accounts with these entities do not need to be reported. You do not need to report assets if a person who has a beneficial interest in a foreign trust or foreign estate does not know about or has reason to know about the interest. If you receive distributions from a foreign trust or foreign estate, you acknowledge your interest in the trust or estate. You do not need to report if you have an interest in social security, social insurance, or other similar programs of a foreign government, as these are not considered designated foreign financial assets. If a certain foreign financial asset has already been reported on another Form, then you do not need to report it a second time on Form 8938.
Usually a reasonable estimate of the highest fair market value of an asset during the tax year is reported and one needs to determine the value of a designated foreign financial asset to know if it exceeds any applicable threshold based on filing status etc. a reasonable estimate of the market value of certain foreign financial assets is sufficient based on publicly available information from reliable financial sources or other verifiable sources. For foreign assets, the value is denominated in foreign currency. One must use the US Department of the Treasury Bureau of Fiscal Services foreign currency exchange rates to convert denominations into US dollars. The exchange rate is based on the exchange rate on the last day of the tax year.
Effects of Non-Compliance:
The penalties for disobedience are enormous. If an individual has to file Form 8938 but doesn’t file it, the IRS charges a $10,000 failure to file penalty, an additional penalty of up to $50,000 for continued failure to file after IRS notification, and a 40 percent penalty for tax deductions attributable to assets not disclosed. If a person fails to properly file or report assets on Form 8938, the statute of limitations is extended three years after the person provides the required information. If someone loses more than $5,000 in gross income associated with a particular offshore financial asset, the time limit is extended to six years after you file your return. Exceptions apply if the failure is for a reasonable reason, then the statute of limitations is extended only to matters or matters related to the failure and not to the entire Notice. If the failure to disclose is for a reasonable reason and not due to willful negligence, no penalty will be imposed. Reasonable causes are determined on a case by case basis, based on facts and circumstances.
The IRS has announced a new simplified compliance procedure, if you are a non-resident US taxpayer. Contact a tax professional to have your case examined to ensure compliance with FACTA.
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