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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: ,

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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