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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: ,

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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More Info about Form 1042-S

November 30th, 2010 2 comments

Internal Revenue Service Form 1042-S, titled “Foreign Person’s U.S. Source Income Subject to Withholding,” must be filed for non-residents and foreign entities that have derived income or gains from investments in the US in the past year. These gains can include ordinary income dividends, long-term capital gains, or return of capital distributions. Gains from interests in US real estate also require reporting. Foreign corporations, foreign partnerships, foreign estates and foreign governments and foreign individuals should all list gains from US-based investments on the 1042-S form.

Other types of income that should be reported on Form 1042-S are: wages of employees who have claimed tax treaty benefits, fellowship/scholarship income, payments made to foreign independent contractors, royalty payments, and prizes or awards.

Form 1042-S includes a space to report withholding on investment distribution. Short-term capital gain and qualified interest income can be exempt from withholding (this exemption requires verification of the investor’s foreign status), as are long-term capital gains. Foreign persons or entities are not required to file a return if the withholding amount is equivalent to their tax obligation, or if they have not participated in income-generating trade or business inside the United States in the past year.

A 1042-S form should be filed by every withholding agent. This means an individual, a corporation, partnership or trust responsible for payment towards the foreign person’s income or investment gains. The withholding agent is defined this way regardless of whether actual withholding is required. Records of the form should be kept for three years after the original reporting date.

Every entity that engages in business with a foreign person, corporation or partnership is required to file a return for the income or capital gains they pay out. The benefit of this is that it allows non-resident alien individuals and foreign businesses to easily keep track of their investments, trading interests, and income sources within the United States.

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