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FATCA and Foreign Bank Accounts: The Issue of Withholding and Reporting for Expatriates

October 1st, 2014 No comments

The Foreign Account Tax Compliance Act (FATCA) is a broad based law that adds to the already complex banking problem faced by many expatriates who live or work in foreign countries.  Many of these expats have bank accounts in foreign financial institutions, which may fall under the reporting requirements established under FATCA.  Essentially, FFIs must share the name and account data of US taxpayers who hold accounts and this reporting requirement is controlled through either an intergovernmental agreement or the FATCA law itself.

The reporting requirement is onerous enough on its own, but failure to comply will result in any US sourced payments to that FFI to be subject to a 30% withholding rate.  This was done in large part to affect those who were sending money offshore in order to evade taxes.  One result was that many FFIs simply stopped accepting US account holders, even if they were residents of the foreign country.  This affected many expats who found themselves unable to open an account at certain banks.

Many expats are retired abroad and receive their money from a US bank through wire transfer or ACH transfers, so the new FATCA law cast such a broad net that it affected almost any US citizen with a foreign bank account.  So, if an expat has an account at an FFI who does not comply with FATCA, then any type of payment could have a 30% withholding until the expat could show that they were complying with tax laws.  Theoretically, this could include pension or Social Security payments, or even wire transfers from one’s own account to an FFI.

The other issue for expats is that of declaring interest earned in an FFI account.  While this is not covered by FATCA, there is a requirement to report this type of worldwide income on Form 8938, and including it on the tax return.  If the amount of interest or dividends exceeds $1500 per year then there is a separate and additional reporting requirement with Form FinCEN -114.  At the moment, the taxpayer has the reporting burden for this type of income, and FFIs are not necessarily required to handle it.

However, given the degree of scrutiny by the IRS over foreign accounts, it is not hard to imagine an expansion of FATCA that would require FFIs to send an annual accounting to either the IRS or their assigned governmental agency in the foreign country.  This would be an easy step to take since the reporting of account holder names and data is already being supplied.  A simple interest and dividend statement would not be a difficult thing for FFIs to supply if requested under FATCA.  This would effectively place FFIs in the position of being ‘tax agents’ on behalf of the IRS if they have US taxpayers as account holders.

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Categories: IRS Form 1042-S Tags: ,

Definition of a Withholding Agent Under Chapter 4 FATCA Reporting Requirements

October 1st, 2014 No comments

The expansion of the use of Form 1042-S has created a very broad definition of those who may be required to file the form.  This stems from the inclusion of Chapter 4 payments on the form as required under the Foreign Account Tax Compliance Act (FATCA).  As discussed, the purpose of FATCA is to locate and track foreign accounts held by US residents and taxpayers, to ensure that they are not evading taxes by holding assets offshore.

The Form 1042-S instructions provided by the IRS offer some guidance on how a withholding agent will be defined for Chapter 4 purposes, since that is the party that must file the form and make the withholding.  The definition is worth examining since it is so broad, many payers may unknowingly fall under the new classification.  The only clear exclusion to the 1042-S requirements are payments strictly confined to US borders or territories, in which case Form 1099 would be used.

Definition of Withholding Agent For Chapter 4

The definition begins with:  “…any person, US or foreign…who can disburse or make payments of an amount subject to withholding…under Chapter 4.”

The next part states:  “The withholding agent may be an individual, corporation, partnership, trust, association, or any other entity.”

This definition includes virtually anyone who can make a payment to a foreign account, even if no payment has yet been made.  This clearly includes typical financial institutions but also could be an individual or business making foreign payments.

Further, the definition continues to broaden:   “A person may be a withholding agent even if there is no requirement to withhold from a payment or if another person has already withheld the required amount from a payment.”  (emphasis added)

Under this definition, Form 1042-S has to be filed even if another agent withheld already, or if no withholding is required.  This is designed to capture payments made through intermediaries en route to the recipient, or if the payment falls under some exception to the withholding requirement.

Required Information and Data for All Agents and Intermediaries

Obviously, the definition is geared to tracking payments rather than simply reporting withholding amounts, and a review of the form shows that the changes for 2014 reflect this intention.  Box 8 requires reporting of total tax withheld by other agents, which seems nearly impossible to obtain unless all agents and payers are in close communication and sharing all withholding data with one another.

The form also requires all the identification numbers and location information for the primary withholding agent, as well as intermediary or flow through entities that may have been involved in payment or withholding (Boxes 12a to 13f and 14 through 16f).

Given the range of information required to complete the form accurately, anyone who has made any kind of payment from a US source to a foreign account should keep detailed records of payments, intermediaries and amounts withheld.  Due to the fact these are new requirements, the IRS will be lenient through 2016 with reporting as long as ‘good faith efforts’ are being made to comply.

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FATCA: Foreign Account Tax Compliance Act

May 11th, 2014 1 comment

Background

FATCA (Foreign Account Tax Compliance Act) is a measure passed in 2010 to ensure accurate tax reporting by foreign financial institutions (FFI) having US taxpayers as customers.  The law is designed to address the use of foreign or ‘off-shore’ accounts to avoid payment of US taxes, but its effect will be far broader than originally thought.  It has evolved into a global tax reporting network that will now include cooperation with foreign institutions and their governmental tax authorities.

FFI Reporting

The Act requires FFIs to report on the holdings, earnings and gains of US customers with accounts over $50,000, or face fines and sanctions from the US government.  This requirement had the immediate effect of FFIs choosing to ‘lock-out’ US customers to avoid the onerous reporting requirements.  The choice for FFIs was simple, become a reporting agent for the Internal Revenue Service, or face penalties and possible exclusion from the US controlled financial network.  To enforce the rule of identifying US account holders and account proceeds, FFIs who fail to make a good faith effort to comply will face a 30% withholding on US-sourced payments.   Not surprisingly, many FFIs simply opted to close the accounts of US citizens and avoid the reporting requirement altogether.

US Taxpayer Reporting

The US foreign account holder also has a reporting duty under FATCA for accounts valued over $50,000.  Foreign investments over that threshold must be reported on the annual tax return or risk a penalty of at least $10,000.  Failure to list the asset will result in a 40% tax surcharge if US taxes were avoided at any point.  Since FFIs are mandated to report US taxpayer identities, there will be a cross-checking system in place to enforce these rules.

The Impact of Intergovernmental Agreements

The administrative burden placed on FFIs has brought a few delays to implementing the FATCA rules, and in the meantime governments have been at work trying to find a means to work together directly.  Intergovernmental Agreements (IGA) have been established between the United States and a growing list of countries that will allow FFIs to report the information directly to their own government agency, who will in turn hand it over to the IRS.

Although many countries have been reluctant to sign these agreements, the role and influence of the US financial system has been difficult to resist.  In essence, this is the founding of a global tax reporting network that could eventually affect any account holder in the world, as all governments begin to see the opportunity to crack down on tax evasion.  The list of governments participating in an IGA can be found here: http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA-Archive.aspx

FATCA Rules for Foreign Account Holders in the United States

Reflecting some of these tax information sharing agreements are changes to IRS Form 1042-S, which requires non-US citizens to report US sourced income subject to withholding.  Therefore, non-US banks must report gains by any account held in the US, even if the account holder is a foreign citizen.  In essence, this expansion of FATCA’s reach ensures that the IRS will eventually have access to any account information with ties to the US financial system, whether at home or abroad.

Recently, the IRS declared 2014 and 2015 as a transition period for FATCA, delaying some of the enforcement requirements and penalties, but this is a measure that continues to expand in its reach and application in global banking.

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Categories: FATCA Tags: ,