Delays in FATCA Rules
Foreign Account Tax Compliance Act (FATCA) implementation set for January 1, 2014 has been delayed six months. The six-month delay is expected to give the U.S. more time to conclude negotiations and sign agreements to implement FATCA with various foreign governments. After the full implementation of FATCA, the failure to voluntarily report foreign financial accounts and avoid the extremely harsh penalties for failure to do so may become virtually impossible.
FATCA’s scope is very far reaching. FATCA requires certain foreign financial institutions (FFI’s) to report information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. The reporting institutions include not only banks, but also other financial institutions, such as investment entities, brokers, and certain insurance companies. Some non-financial foreign entities will also have to report certain of their U.S. owners.
FATCA also requires that some individuals holding financial assets outside the U.S. must report those assets to the IRS. The IRS has developed Form 8938, Statement of Specified Foreign Financial Assets. This reporting requirement is separate from the long-time reporting requirement under the Bank Secrecy Act to file an “FBAR” (Form TD F 90.22-1, Report of Foreign Bank and Financial Accounts).
In early 2013, the Treasury Department and the IRS issued final FATCA regulations. The final rules require withholding agents to withhold 30 percent of certain payments (called “withholding payments”) to FFIs unless the FFI has entered into a reporting agreement with the IRS. To avoid withholding under FATCA, a participating FFI must enter into an agreement with the IRS to:
- Identify U.S. accounts,
- Report certain information to the IRS regarding U.S. accounts (This reporting is generally similar to 1099 reporting plus the account balance.), and
- Withhold a 30 percent tax on certain U.S. connected payments to non-participating FFIs and account holders who are unwilling to provide the required information.
The final regulations called for the gradual phasing-in of the FATCA rules beginning in 2014 and continuing through 2017. Now, the Treasury Department and the IRS have further delayed the start of some of the FATCA rules, including rules on withholding, reporting and due diligence by FFIs. Withholding agents generally will be required to begin withholding on withholdable payments made after June 30, 2014 instead of December 31, 2013.
Withholding agents also generally will be required to implement new account opening procedures by July 1, 2014. In addition, Treasury and the IRS intend to modify the final regulations so that the information reports previously required from certain FFIs on U.S. accounts for the 2013 and 2014 calendar years will be required only for 2014 (with respect to U.S. accounts identified by December 31, 2014). Reporting by these FFIs would be required by March 31, 2015. This reporting date is important. Once the IRS receives foreign account information on a U.S. person who has failed to properly report their foreign accounts, that person would no longer be eligible for the 2012 Offshore Voluntary Disclosure Program.
Since FATCA became law, the U.S. has been negotiating with foreign countries to implement its foreign account reporting requirements. The U.S. has developed two model agreements. The first agreement generally requires an FFI to report account information to its government, which, in turn, will exchange the information with the IRS. Under the second agreement, an FFI reports account information directly to the IRS. As of August 1, 2013, the U.S. has entered into agreements with nine countries; Denmark, Germany, Ireland, Japan, Norway, Mexico, Spain, Switzerland, and the UK. The Treasury Department has reported that it hopes to conclude negotiations before 2014 with Argentina, Belgium, India, Korea, Malaysia, New Zealand, South Africa, the UAE and many other countries.
Impact on Individuals with Unreported Offshore Assets and the 2012 Offshore Voluntary Disclosure Program
In January 2012 the IRS opened the 2012 Offshore Voluntary Disclosure Program (“OVDP”) which is open ended but could be closed without notice. Under the OVDP, U.S. taxpayers who have failed to properly report their offshore accounts and income from these accounts may enter the program. All taxpayers are generally eligible for the OVDP except for taxpayers that criminally evaded taxes and taxpayers whom the IRS has already detected as having an unreported offshore account. The IRS objective for FATCA is to increase the detection rate of previously unreported foreign accounts to as close to 100% as possible. As the March 15, 2015 date approaches, the OVDP program will no longer be available to many taxpayers whose accounts will be reported under FATCA to the IRS. In many cases, these accounts will be detected even earlier as FFIs meet the various reporting requirements.
Taxpayers who have not yet entered the OVDP program or otherwise taken appropriate action with respect to unreported foreign accounts need to take action. FATCA will eventually identify most, if not all, previously unreported foreign accounts. Possible actions include:
- Enter the OVDP program. Requirements; amend up to 8 years of prior tax returns to properly report and pay income tax on previously unreported offshore account income and pay a penalty equal to 27.5% of the unreported offshore assets.
- Make a determination that the penalties that could apply are less than those offered by the OVDP program and amend the tax returns from the open tax years and pay the applicable tax, interest and penalties due.
The penalty for failure to report a foreign account is equal to $10,000 per violation. A person who willfully fails to report an account may be subject to a civil penalty equal to the greater of $100,000 or 50 percent of the account balance. This penalty can be particularly harsh in that if an account is unreported for four years, the 50% penalty would equal approximately 200% of the account balance. These are just examples of potential penalties that could apply. Depending on a taxpayer’s situation, the reporting rules and related penalties can be substantially more complex.
Brown Smith Wallace can help
With the imminent implementation of FATCA, the noose is tightening around U.S. taxpayers with non-compliant offshore financial accounts. Brown Smith Wallace is prepared to assist taxpayer’s with analyzing their options to determine the best course of action. Please contact Doug Eckert, Member, International Tax Services at 314-983-1268 or firstname.lastname@example.org.