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What the FATCA does all this mean?

Written by Sandy King on 27 September 2014

The tax treatment of non-US investment Assets can be severe for US residents whether you are a resident alien, Green-Card holder living in the US or a US citizen living Abroad.  The US regulatory Authorities are imposing greater reporting requirements and higher penalties for non-disclosure.

Much of the regulation centers on the US Bank Secrecy Act.  This Act was introduced in 1970 and has been pursued with increasing vigour since the notorious publicity surrounding unreported bank accounts held in Switzerland and in the aftermath of the attacks on September 11, 2001.  This Act states that every US citizen or resident must file a report of Foreign Bank and Financial Accounts (FBAR) if they have a financial interest in or signatory over, foreign accounts worth $10,000 or more during any tax year.

More recently, President Obama introduced the Hiring Incentives to Restore Employment Act (HIRE Act) to stimulate job creation. Part of this Act is the Foreign Accounts Tax Compliance Act (FATCA).  The intention of FATCA was to tackle offshore tax evasion; however these regulations have imposed stringent due diligence and reporting requirements on non-US financial institutions in respect of foreign accounts owned by US Citizens, residents and entities.

As the US government seeks to resolve its budget deficit,  US citizens and residents can expect at the very least more attention regarding their non-US holdings and at worst,  the regulations may become even more severe in years to come.

Who does FACTA affect?

FATCA is aimed at foreign financial institutions and US taxpayers with investments overseas. A foreign financial institution (FFI) is any foreign bank, investment house, insurance company or other financial institution that holds cash, equities or other financial assets for US taxpayers or any organisation in which a US taxpayer may have a ‘substantial’ interest, like an offshore company or trust. An FFI must identify which clients are US citizens and submit a detailed report about their earnings or gains to the Internal Revenue Service (IRS) every year.

I am a US taxpayer, what must I do under FACTA?

Along with their annual tax return, US taxpayers must file Form 8938 if they held assets worth $50,000 or more overseas after March 18, 2010. The taxpayer should list any offshore assets or income on the form and tax return.

What are the penalties for not reporting?

Those failing to report foreign investments will suffer a $10,000 fine – which can increase up to $50,000 for a continuing offence. The IRS will also top up any underpaid tax from failing to notify with a 40% surcharge.