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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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What’s new with IRS Form 1042-S for tax year 2014?

August 28th, 2014 33 comments

A lot is new!

IRS Form 1042-S has always been a difficult form that very few people understand.  We work with book publishers, model agencies, casinos and many other companies year after year and very few understood Form 1042-S and the data required.  Each year, we email back and forth requesting more data so that the form can be filled out correctly and e-filed correctly with the IRS.

Here comes tax year 2014.  Form 1042-S is completely redesigned and split as:

Chapter 3 — WITHHOLDING OF TAX ON NONRESIDENT ALIENS AND FOREIGN CORPORATIONS

Chapter 4 — TAXES TO ENFORCE REPORTING ON CERTAIN FOREIGN ACCOUNTS

If you prepared Form 1042-S in tax year 2013 or for any prior year, then you have been reporting information under Chapter 3 (you just didn’t know it was Chapter 3).  Chapter 3 is the reporting of withholding for a non-US resident by a US company.  Book publishers are a classic example.  A United States publishing company will print books by writers from around the world.  Non-US writers are subject to withholding which means the publishing company (the withholding agent) has to withhold part of their pay and send that money to the IRS.  The writer (or recipient) might have an opportunity to get that withheld money from the IRS depending on which country they are from and whether that foreign country has a tax treaty set up with the United States.  The list of countries that do have a tax treaty with the IRS are in this article.  Most recipients who receive a Copy B by mail or email just give up and let the IRS keep the money.  If a publishing company withheld $40 or $100 from your pay and sent that to the IRS, are you going to chase that cash?  Probably not and the IRS knows this and they are gaining revenue.

All of the data you used to paper or electronically file for Chapter 3 in prior years is used again for tax year 2014. Tax year 2014 additionally requires

  1. Recipient’s account number.  Last year this was optional.  The account number is a unique set of letters, numbers, hyphens and blanks up to 20 characters in length.
  2. Recipient’s date of birth.
  3. Foreign taxpayer identification number, if any.

The recipient’s date of birth will probably stump most withholding agents. These are non-US residents; most of the withholding agents don’t retain a foreign TIN or have an account number for a client.  Having a birth date is really pushing it.  The good news is that the 1042-S instructions states

Use box 20 to enter the recipient’s date of birth if it is available in the withholding agent’s electronically searchable information.

That means the withholding agent dodged a bullet for TY2014 and can just enter blanks.  Just below that paragraph, the 1042-S instructions states:

 Starting in calendar year 2017, the withholding agent will be required to report either the recipient’s foreign tax identification number or the recipient’s date of birth.

That means that for everyone who filed 1042-S forms in prior years, the data you collected is fine and can be used for now.  But you have to start collecting the recipient foreign TIN or date of birth.  Its going to be required and you can’t paper or electronically file Form 1042-S without this information.  This is all good news for all of our clients because I doubt anyone collected this information. But a warning that more data must be retained by the withholding agent.

The big change to Form 1042-S is the inclusion of Chapter 4 reporting.  Lots and lots of edit fields related to Chapter 4 which is also commonly known as FATCA.  FATCA is the Foreign Account Tax Compliance Act (FATCA). It is a new law in the United States that requires US people, including individuals who live outside the United States, to report their financial accounts held outside of the United States.  These are financial accounts held in banks in Europe, Canada and anywhere else outside of the US.  The United States IRS wants to know that these accounts exist and who owns them.  Specifically, the IRS wants:

  1.  The withholding agent, in this case, the non-US bank or foreign financial institution (FFI) to report to the IRS about their US clients.  Whoa!!  Step back and read that again.  FATCA requires that these foreign financial institutions voluntarily fill out Form 1042-S and mail or email Copy B to the US entity reporting that they have a non-US financial account.  That FFI also has to send Copy A of Form 1042-S to the IRS.
  2.  US residents who own these foreign accounts or assets must report them on the new IRS Form 8938, Statement of Specified Foreign Financial Assets.

The IRS gets the information they want from someone and whoever doesn’t report may be penalized.  How does the IRS plan on penalizing a bank that is located in Switzerland or anywhere outside of the United States that doesn’t report this information?  I don’t know.  The US must have a strong tax treaty with this foreign countries to motivate their financial institutions to report this information to the IRS.  The change in Form 1042-S and new Form 8938 make it more difficult for a US citizen, living in or outside of the United States, to conceal assets held in offshore accounts.  Once the IRS knows where new money is held, new federal tax revenues follow.

 

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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: ,