Does it comply with FATCA?

The Foreign Accounts Tax Compliance Act was enacted by Congress in 2010 as part of the Hiring Incentives to Restore Employment Act (HIRE) to combat tax evasion by U.S. individuals who have investments in accounts in the United States. Foreign. The United States Department of the Treasury and the IRS continue to develop guidelines on FATCA. The Act generally requires foreign financial institutions to report certain information about certain financial accounts maintained by US taxpayers or by foreign entities in which US taxpayers have a substantial ownership interest and pay the taxes they owe.

FATCA generally requires the reporting of foreign financial assets, including some common ones, such as financial accounts maintained at foreign financial institutions. Foreign stocks or securities not held in a financial account. Interests of foreign companies and mutual funds. Some of the less frequently reported are those such as investment assets held by trusts of domestic or foreign grantors of which you are the grantor. Life insurance or annuity contracts issued abroad with cash value. Foreign hedge funds and foreign private equity funds.

American law treats American and foreign people differently for tax purposes. US National Refers to a person born in the United States, Puerto Rico, Guam, US Virgin Islands Individuals who were born in American Samoa or born in the Commonwealth of the Northern Mariana Islands who chose to be treated as US citizens. The Child Citizenship Act, which applies to both the adopted and biological children of US citizens, provides for the automatic acquisition of US citizenship after certain conditions are met. An alien is any individual who is not a US citizen or US citizen, they are considered a non-resident alien unless they meet one of the two tests. You are a resident alien of the United States for tax purposes if you meet the green card test or the substantial presence test for the calendar year (January 1 to December 31). You are a resident, for US federal tax purposes, if you are a lawful permanent resident of the United States at any time during the calendar year. This is known as the “green card” test. To meet the United States resident test for tax purposes, you must be physically present in the United States (USA) in at least:

1) 31 days during the current year and

2) 183 days during the 3-year period that includes the current year and the two immediately preceding years.

Under FATCA, US taxpayers who have financial assets outside of the United States must report those assets to the IRS. It adds to the old requirement to file a report with the tax return known as the FinCEN Form 114 Foreign Bank and Financial Accounts Report known as FBAR. FATCA requires foreign financial institutions to report directly to the IRS information on financial accounts maintained by US taxpayers or by foreign entities in which US taxpayers have a substantial ownership interest. Reporting institutions include not only banks, but other financial institutions such as investment entities, brokers, and certain insurance companies. Some foreign nonfinancial entities must also report their US owners. We can see that this is the reason why when you try to open a new account with a foreign financial institution, you ask for information about citizenship.

FATCA requires US taxpayers with foreign financial assets with an added value above the filing threshold (at least $ 50,000) to provide information about those assets on Form 8938 along with tax returns. The filing thresholds vary based on whether you file a joint income tax return or live abroad. If you are single or file a separate return from your spouse, you must file Form 8938 if you have more than $ 200,000 of foreign financial assets at the end of the year and you live abroad or more than $ 50,000 if you live in the United States. . A US citizen whose tax domicile is in a foreign country and has been present in a foreign country or countries for at least 330 days out of a consecutive 12-month period is considered to be living abroad. When you file a joint tax return for married and living abroad, you must file Form 8938 when the total value of foreign financial assets is more than $ 400,000 on the last day of the tax year or more than $ 600,000 at any time during the year. These thresholds apply even if only one of the spouses resides abroad. If you are not married, the total value of financial assets is more than $ 200,000 on the last day of the tax year or more than $ 300,000 at any time during the year.

One must file Form 8938 if filing as sole and the total value of foreign financial assets is more than $ 50,000 on the last day of the tax year or more than $ 75,000 at any time during the tax year. In the case of filing the tax return as a married filing joint return, the total value of foreign financial assets is more than $ 100,000 on the last day of the tax year or more than $ 150,000 at any time during the tax year. If you file as married separately, then the total value of the foreign financial assets is more than $ 50,000 on the last day of the tax year or more than $ 75,000 at any time during the tax year. When calculating the value of foreign financial assets, threshold, include half the value of any specified foreign financial assets owned jointly with your spouse. But for reporting purposes, the full value must be reported on Form 8938.

Foreign financial assets:

Foreign financial assets include foreign financial accounts and foreign non-accounting assets held for investment (as opposed to those held for use in a business or business activity), such as foreign stocks and securities, foreign financial instruments, contracts with non-US persons, and interests. in foreign entities. These must be reported.

Foreign currency is not a specific foreign financial asset. Foreign real estate is not a specific foreign financial asset if it is used as a personal residence or rental property. If real property is held through a foreign entity, then the interest in the entity must be reported if the total value of all specified foreign financial assets is greater than the reporting threshold that was applied. Directly owned tangible assets, such as art, antiques, jewelry, automobiles, and other collectibles, are not specified foreign financial assets. Precious metals in direct possession, such as gold, are not specified foreign financial assets. However, gold certificates issued by a foreign person can be a foreign financial asset and must be reported under the reporting threshold.

Exceptions:

You do not need to report an asset if a US payer maintains a financial account. A US payer includes a US branch of a foreign financial institution, a foreign branch of a US financial institution, and certain foreign subsidiaries of US corporations. Therefore, it is not necessary to report the financial accounts with these entities. You do not have to report assets if the person who has a beneficial interest in a foreign trust or foreign estate does not know or has reason to know the interest. If you receive a distribution from a foreign trust or estate, you are aware of your interest in the trust or estate. You do not have to report if you have an interest in a foreign government’s social security, social security, or other similar program, as these are not considered specified foreign financial assets. If specified foreign financial assets have been reported on other forms, you do not need to report them a second time on Form 8938.

Normally, a reasonable estimate of the highest fair market value of the asset during the fiscal year is reported and it is necessary to determine the value of the specified foreign financial assets to know if the value exceeds the applicable threshold based on marital status for reporting purposes. , etc. To determine the fair market value of a specific foreign financial asset, a reasonable estimate based on publicly available information from reliable financial sources or other verifiable sources is sufficient. For foreign assets, the value is denominated in foreign currency. Use the foreign currency exchange rates from the US Department of the Treasury Office of Tax Services to convert the denomination into US dollars. The exchange rate is based on the exchange rate on the last day of the fiscal year.

Effect of non-compliance:

The penalty for non-compliance is huge. If one has to file Form 8938 but does not file it, then the IRS imposes a penalty of $ 10,000 for failure to file, an additional penalty of up to $ 50,000 for continued failure to file after IRS notification, and a penalty 40 percent for an understatement of taxes attributable to undisclosed assets. If one does not properly submit or report an asset on Form 8938, the statute of limitations extends three years after the time the required information is provided. If you omit more than $ 5,000 from gross income attributable to specific foreign financial assets, the statute of limitations extends to six years after you file your return. Exceptions apply if the failure is due to reasonable cause, then the statute of limitations extends only with respect to the item (s) related to such failure and not the entire tax return. If the failure to disclose is due to reasonable cause and not willful negligence, no penalty will be imposed. Reasonable cause is determined on a case-by-case basis, based on facts and circumstances.

The IRS has announced a new simplified compliance procedure, if you are a nonresident US taxpayer. Contact a tax professional to visit your case to ensure FACTA compliance.