USA Foreign Account Tax Compliance Act (FATCA)

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The Foreign Account Tax Compliance Act (FATCA), enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, is an important and highly controversial development in U.S.efforts to combat tax evasion by U.S.persons holding investments in offshore accounts.

Under FATCA,U.S.citizens and taxpayers holding financial assets outside the United States will report those assets to the IRS. In addition, FATCA will require foreign financial institutions to report directly to the IRS certain information about financial accounts held by U.S.taxpayers, or by foreign entities in which U.S.taxpayers hold a substantial ownership interest.

Reporting by U.S. Taxpayers Holding Foreign Financial Assets

FATCA requires certain U.S.taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 to report certain information about those assets on a new form (Form 8938) that must be attached to

the taxpayer’s annual tax return.  Reporting applies for assets held in taxable years beginning after March 18, 2010.  (Notice 2011-55 provides guidance for affected taxpayers required to file prior to the availability of Form 8938.) 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.

Reporting by Foreign Financial Institutions

FATCA will also require foreign financial institutions (“FFIs”) to report directly to the IRS certain information about financial accounts held by U.S.taxpayers, or by foreign entities in which U.S.taxpayers hold a substantial ownership interest. To properly comply with these new reporting requirements, an FFI will have to enter into a special agreement with the IRS by June 30, 2013. Under this agreement a “participating” FFI will be obligated to:

(1) undertake certain identification and due diligence procedures with respect to its account holders;

 (2) report annually to the IRS on its account holders who are U.S. persons or foreign entities with substantial U.S. ownership; and

 (3) withhold and pay over to the IRS 30-percent of any payments of U.S. source income, as well as gross proceeds from the sale of securities that generate U.S. source income, made to

(a) non-participating FFIs,

(b) individual account holders failing to provide sufficient information to determine whether or not they are aU.S.person, or

(c) foreign entity account holders failing to provide sufficient information about the identity of its substantial U.S.owners.

Notice 2011-53 provides the phased-in time line of key FATCA implementation dates for FFIs. It is important to note that many details of the new reporting and withholding requirements pertaining to FFIs must be developed through Treasury regulations that are expected to be proposed by December 31, 2011.

U.S. taxpayers living outside of USA should take proactive action to report their off shore financial interest to IRS on time. Simple compliance with FATCA, will eliminate your tax filing jitters and stress.  Also keep in mind the amount of fines and penalty for non-compliance. Consult an experienced Cross Border tax expert, to help you comply with FATCA.