This commercial always perplexed me as a child, because I was pretty sure that “relief” was not spelled as “r-o-l-a-i-d-s,” despite what the actors and TV announcers said. I finally took my concerns to my mother, because she always had all the answers. She assured me that I was right, and that the intentional misspelling was just the product slogan. In retrospect, I believe that my young mind was thrown by the fact that both “relief” and “Rolaids” begin with “r.”

Today, if you speak to a random IRS agent, he or she may spell “relief” as “F-A-T-C-A,” the unfortunately-named acronym that is only one letter shy of “fat cat.” As you probably already know, lingering effects of the Great Recession have led to a great deal of worldwide belt-tightening, as well as no small amount of political animosity towards those who allegedly aren’t paying “their fair share.” Last July, the Organization for Economic Co-Operation and Development, an EU-type international body with more than 80 members, including the United States, trumpeted out the Standard for Automatic Exchange of Financial Account Information in Tax Matters. This Common Reporting Standard requires member states to obtain information from the financial institutions within their borders, and exchange this data with other members.

Our government was actually a bit ahead of the curve in this area, at least indirectly so. The Foreign Account Tax Compliance Act was passed in 2010, but has become effective only since July 2014. So, this may be the first tax year that foreign account-holders receive a curious-looking letter from their bank. And, as a rule of thumb, any bank correspondence that contains the phrase “Dear U.S. Taxpayer” as opposed to “Pay to the Order Of” is typically not good news.

The Backstory

West Virginia Democrat Allan Mollohan introduced the Hiring Incentives to Restore Employment Act in June 2009. It eventually made its way to President Obama’s desk, becoming law in March 2010. The HIRE Act (the boys on The Hill evidently have better interns than the IRS, because that’s a clever acronym) created tax incentives for businesses to hire unemployed workers. In keeping with the new spirit of fiscal responsibility, Congress had to come up with a way to fund the tax cuts that didn’t involve swiping the world’s biggest Visa card.

Cue FATCA. By ostensibly requiring non-residents to pay more taxes, it had the appeal of giving the bill to people who would probably not be voting in the next election. At the time, it was estimated that the government was losing about $100 billion a year in taxes from unreported offshore assets. Never mind the fact that Australia considered and rejected a similar plan, because the implementation costs would far exceed the money collected. In the immortal words of the fictional President in The Simpsons Movie: “I’m paid to lead, not to read.”

There were some other concerns as well. Foreign leaders, who aren’t exactly chanting “U-S-A! U-S-A!” on their way to the office, may resent the fact that they are now, in effect, unpaid collection agents for the IRS. FATCA was also the most highly-cited reason for the sudden surge in citizenship renunciations. Finally, there was some concern as to whether the IRS had the ability to handle an influx of complex returns. The Service ended up throwing up its hands and labeling 2014 and 2015 as a “transition period.”

How it Works

To boil it all down, FATCA has essentially three key provisions. Taxpayers must file Form 8938 if they own an overseas bank account that exceeds a certain value – typically $50,000 (USD). FATCA also ends the practice of converting U.S. dividends to “dividend equivalents” through the use of swap contracts. Finally, Foreign Financial Institutions must identify U.S. account holders and release details about their assets.

To satisfy their patriotic duty, foreign banks first have to do some homework. For example, one FATCA section requires that Switzerland direct all “Reporting Swiss Financial Institutions” to:

• Register with the IRS by July 1, 2014, and agree to comply with the requirements of an FFI Agreement, including with respect to due diligence, reporting, and withholding from Preexisting Accounts identified as U.S. Accounts, and
• Request from each Account Holder the Account Holder’s U.S. TIN and a consent, covering irrevocably the current calendar year and automatically renewed for each successive calendar year … to report and simultaneously inform the Account Holder through a letter of the Swiss Federal Tax Administrator (FTA) that, if the U.S. TIN and such consent are not given …

The Foreign Financial Institution then forwards this information to the IRS.

Technically speaking, you do not have to sign the declaration and provide the information, just like you don’t technically have to feed the cat or put gas in the car or pay the light bill. If you refuse to provide the requested information, many FFIs may declare you to be a “recalcitrant taxpayer” and duly close your account. More likely, however, the FFI will issue an aggregate report. The bank collects account data from all accounts whose owners refused to provide information, for whatever reason.

If you do not sign the declaration and the bank issues an aggregate report, fasten your safety belt, because the next step is probably an audit.

Exemptions

Now, we get to the good stuff. Going back to the U.S. – Swiss FATCA agreement, there are a number of accounts that are exempt from reporting requirements, provided that they were established in Switzerland and maintained by a local bank:

• Retirement accounts held by at least one exempt beneficial owner,
• Pension institutions or other retirement arrangements,
• Vested benefits institutions,
• Guarantee fund,
• Certain institutions for recognized forms of pension provision (pillar 3a),
• A substitute occupational pension fund,
• Qualified employer-funded welfare funds, and
• Certain investment foundations.

Vested benefits insurances and restricted pension plan insurances are also on the exempt list.

Generally speaking, these FATCA classifications are not all-or-nothing, as most accounts may have multiple purposes. So, the real question is not so much whether your account is per se exempt, but rather if it can be legally shoehorned into an exempt category. Fight the temptation to add a few superfluous transactions to evade the reporting requirement, because the Service will bust you for that. Also, be sure that the account was born and raised in a foreign country. Before you sign anything, consult a tax lawyer who focuses on these matters.

In a similar vein, a Reporting Swiss Financial Institution is exempt from withholding tax with respect to an account of a non-consenting account holder if it complies with its reporting obligations, and the Foreign Tax Authority exchanges the information requested by the IRS as part of a group request within eight months from the date of receipt of the group request.

Review

If there is no independent declaration, and the Foreign Financial Institution (FFI) winds up issuing an aggregate report, here is a thumbnail view of what happens next.

First, some general housekeeping. The FFI must publish the group request in the Swiss Federal Gazette and on its website. Second, it must request the bank holding the information to identify the account holders involved and to provide it with all the relevant documents pertaining to the “non-consenting U.S. accounts.” Isn’t that a lovely phrase?

You have some rights. The U.S. account holder may submit a statement to the Swiss taxing authority opposing the transmission of account information to the IRS. The Swiss taxing authority will then review the group request along with any such statement.

To the extent that the Swiss taxing authority’s decision authorizes release of the information requested to the IRS, the U.S. accountholder may appeal to the Swiss Federal Administrative Court (FAC) within 30 days of the decision’s publication in the Federal Gazette. A copy of the appeal must be served contemporaneously on the Swiss taxing authority.

At that appeal, the FAC may do one of two things. If the taxing authority concludes that the appeal is justified, it will reconsider its final decision and refrain from transmitting information to the IRS. However, if the taxing authority pushes the red buzzer, it will submit a motion to the FAC seeking to dismiss the U.S. accountholder’s appeal. The FAC’s decision is final.

After looking at all these hoops to jump through – some of which are on fire – you may reach into the medicine cabinet for the Rolaids. I have no trouble admitting that I’ve chewed through a few tablets myself. But, working together, we can legally minimize your income tax liability and get you on the path to full compliance.