In 2010 President Obama signed P.L. 111-147, the Hiring Incentives to Restore Employment Act. The purpose of the law is in its eponymous title, but the IRS got into the act with the Foreign Account Tax Compliance Act (FATCA) provisions.

FATCA is an attempt by the IRS to “improve reporting compliance” — translation: “widen the net” — to tax U.S. citizens who stash assets abroad.

The new FATCA reporting rules are broad and will impact U.S. corporations and high-income individuals with offshore financial holdings. The IRS issued its final regulations in January 2013 and put its Treasury Department “tax ambassadors” to work.

The result was a series of intergovernmental agreements with more than 50 other countries. FATCA, however, was not solely the work of the U.S. government in an attempt to prop up the dollar as the world’s premier currency.  According to Steven J. Mopsick’s IRS Report Card:

“FATCA negotiations and cooperation with friendly trading partners were in the works long before it became law in the United States in March of 2010 … [T]he creation of a virtual international banking and financial institution data base has been the goal of US trading partners for probably two decades.”

The timeframe

FATCA reporting covers assets held in taxable years starting after March 18, 2010. This, for most taxpayers, will be for the 2011 tax return filed during the 2012 tax-filing season.

The IRS reporting “net”

• U.S. taxpayers who have more than $50,000 in foreign financial assets need to report information about their aggregate holdings on IRS Form 8938.
• Foreign financial institutions (FFIs) in countries included in the international agreements will report directly to the IRS the financial holdings of U.S. citizens.

Under FATCA, FFIs are required to:

• practice due diligence to identify their U.S. account holders
• send a yearly report to the IRS on account holders who are U.S. citizens or are foreign entities with substantial U.S. stockholders/owners

Participating FFIs also must withhold and pay the IRS 30 percent of proceeds from:

• nonparticipating FFIs
• account holders who conceal their nationality
• foreign account holders hiding the identities of their owners and stockholders

Penalties for not complying

Here is a quote from the IRS web article “Summary of Key FATCA Provisions”:

“Failure to report foreign financial assets on Form 8938 will result in a penalty of $10,000 (and a penalty up to $50,000 for continued failure after IRS notification).  Further, underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40 percent.”

The good news is…

The IRS currently doesn’t have the resources to make FATCA a runaway train pursuing those who can run but not hide. The bad news is that they have all the time in the world to activate the steamroller in what seems to be an emerging major tax impact on Americans both home and abroad.

Need some help figuring all this out? Are you out of compliance and need some help with the IRS’ OVDP? Contact us for a free consultation.