The Foreign Account Tax Compliance Act (FATCA) was created to ensure that there are ways for the U.S. Treasury Department to keep track of how much money the country’s citizens and residents are keeping in overseas accounts. It can be difficult to understand how FATCA works in Washington DC due to its similarity to other financial forms and programs. An experienced FATCA attorney can help you meet all your tax obligations.
FATCA requires non-American financial institutions to report the financial assets of U.S. persons to the Treasury Department from 2010 onward. The FATCA law created Internal Revenue Code Section 6048(d), which implemented Form 8938, a Report of Foreign Specified Assets. If a taxpayer’s foreign financial assets meet the reporting threshold, then they must include Form 8938 when they file their taxes. The law ultimately gives the Internal Revenue Service (IRS) greater capability to enforce the FBAR requirements that were already on the books.
For individuals and businesses with unfiled tax returns, the IRS can use the records provided to the IRS from banks, employers, and other third parties to identify the correct amount of income. Then the IRS can prepare a tax return on behalf of the taxpayer without any deductions. This will lead to a much larger tax bill, as well as penalties and interest. For taxpayers who refuse to provide books and records to the IRS during an audit examination, the IRS can summons the records from branch, employers, and third parties. This includes the IRS issuing a summons to a domestic bank to produce records of a foreign bank. This IRS ability to acquire the financial records from foreign countries is key to understanding how FATCA works in DC.
The Foreign Account Tax Compliance Act was a part of the Hire Act of 2010, which was meant as a hiring incentive after the Great Recession. The United States has mandated the reporting of worldwide income since the income tax system was established; and the Bank Secrecy Act of 1970 required taxpayers to file an FBAR to the Treasury Department to show what they hold in their foreign bank accounts.
To complicate matters, other countries such as Switzerland followed strict secrecy laws and generally did not share the existence of client bank accounts with the United States. Therefore, even though it was required by U.S. law, it was difficult for the IRS to secure the necessary documents.
In 2009, there were several Department of Justice tax evasion cases brought against major Swiss banks, including the Union Bank of Switzerland (UBS), which included deferred prosecution agreements and penalties in the billions of dollars. The IRS and Treasury Department determined that they needed to put more energy into requiring foreign countries to share their clients’ financial information with the United States.
Around the same time as these deferred prosecution agreements, the U.S. created FATCA which now requires the Swiss, as well as every other country in the world with U.S. taxpayers, to start sharing that information with the IRS. If individuals had not reported the foreign account and related income, the IRS will assess large penalties for failing to report the foreign account, and assess the tax based upon the account value and unreported income that was shared to them by the foreign banks.
Only U.S. citizens and resident aliens who meet a certain threshold will be required to comply with FATCA. The simplest way to explain how FATCA works is that the reporting thresholds are based on (1) the aggregate of financial assets, (2) the marital status of the taxpayer, and (3) the country in which they reside. For non-married taxpayers living in the United States, they will only have to report if they end the year with $50,000 in overseas accounts, or if their aggregate total hit $75,000 at any point during the year. If they are living outside of the U.S., those thresholds jump to $200,000 and $300,000, respectively.
If a married couple files jointly, and they reside in the U.S., they must report their foreign financial assets if it is $100,000 at the end of the year, or $150,000 at any point during the year. If they resident outside of the U.S., those thresholds are $400,000 and $600,000, respectively.
Call a lawyer today if you require assistance in complying with these procedures. If you have a substantial amount of taxable assets in overseas accounts, it is important that you understand how FATCA works in Washington DC.