Congress passed the Foreign Account Tax Compliance Act in 2010 to go after U.S. tax evaders who concealed assets in offshore accounts. FATCA went into effect on July 1, 2014. Some writers have added a T and described the measure as going after “fat cats;” however, it will likely affect many innocent middle-class individuals.
The U.S. government is unusual in that it taxes income regardless of where earned. A U.S. taxpayer might get a credit for the amount paid to a foreign government or owe no tax, but probably still has to file a U.S. tax return.
If you are a U.S. citizen, green card holder or resident and have an offshore bank account, you’ll likely need to file a disclosure or face serious penalties. There are millions of Americans living abroad and immigrants who live in the States, however, the number of disclosures filed only number a few hundred thousand.
It has taken the IRS and Treasury years to draft regulations and implement the law. Foreign financial institutions have had to create new reporting procedures to comply. Currently, more than 77,000 banks and foreign financial firms have signed on and will report data to the IRS on their U.S. accounts.
In addition, the U.S. has signed information-sharing pacts with 36 countries to facilitate the transfer of data and 42 more are working to finalize agreements. China reached an agreement a week before the law went into effect.
Foreign financial firms have a powerful incentive to comply. If they fail to provide information, any U.S. source income could be reduced by 30 percent. As a practical matter, it would mean that a French account holder at a noncompliant bank would only receive 70 percent of his or her interest payment on a U.S. bond.
Some foreign banks have signed on, but are no longer taking new U.S. accounts. Others are increasing minimum deposit requirements to offset the burdensome regulatory demands.
As new information floods into the IRS, it is unclear what the agency will do with it and whether prosecutions will increase. An agency press release indicated steeper penalties for willful violations and reduced penalties for Americans abroad and non-willful violators. An international tax attorney can explain in detail how the law will affect you and whether a limited amnesty may help.
Source: The Wall Street Journal, “Offshore Accounts: What to Do Now?” Laura Saunders, June 20, 2014