Archive for the ‘FATCA’ Category

8966 FATCA Software: Efiling a nil report?

May 16th, 2017 No comments

Nil means zero.  An 8966 nil report is when the financial institution or filer has no accounts.  The financial institution fills out Form 8966 identifying the reporting financial institution name, address, GIIN and that’s it.  Just this part is filled out:

8966 Just ReportingFI Filled Out

which is basic identifying information of the financial institution.  No account reports or pooled reports are transmitted.  The XML looks like:

<sfa:Name>Large Financial Institution</sfa:Name>
<sfa:AddressFree>123 Main Street</sfa:AddressFree>

The only Form 8966 filers required to file nil reports are direct reporting Non-Financial Foreign Entities (“NFFEs”) and sponsoring entities of direct reporting NFFEs. These entities must file nil reports to declare that they have no substantial US owners for the calendar year. All other entities are not required to submit nil reports unless required by local jurisdiction tax authorities.

1099FIRE can efile 8966 FATCA nil reports on your behalf.  Email sales at, visit our wensite at or call sales at (480) 460-9311.

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8966 Software: Can you efile our FATCA Report on your behalf?

May 9th, 2017 No comments

Yes.  We can efile new, corrected, void, amended and test files to IDES.  We will encrypt the payload file using our digital certificate and you should receive results in about 2-5 days.

Just call sales at (480) 460-9311 to order this service or ask questions.

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What is a Global Intermediary Identification Number?

September 18th, 2014 No comments

Under The Foreign Account Tax Compliance Act (FATCA),  foreign financial institutions (FFI) are required to register with the IRS and report any US account holders, or face a potential 30% withholding tax from US sourced payments.  This global collection of data on US accounts has forced foreign banks, custodial agents and investment entities to enter into a reporting relationship with the IRS if they wish to have US taxpayers as customers.  The withholding agents i.e. those that are making US sourced payments, have to identify which FFIs are in compliance and then withhold on those FFIs that are not.  There is a system in place for withholding agents to identify FFIs in compliance and for the IRA to track the data.

The GIIN and it Effect on FFIs and Withholding Agents

The way that withholding agents and the IRS can identify FFIs that have registered is via the Global Intermediary Identification Number (GIIN) that the IRS issues to the FFI.  In this way, a withholding agent may search the database of FFIs to see if they have registered, and if they have been given a GIIN.  According to the IRS website:

“Withholding agents may rely on the IRS published list or FFI list search and download tool to verify an FFI’s GIIN and not withhold on payments made to the FFI.”

Therefore, the GIIN simplifies the process for withholding agents to know which FFIs have complied with the FATCA directives, and then to fill out Form 1042-S accurately.

On Form 1042-S there is a box for reporting the FFI’s GIIN along with other data required.  Interestingly, there is also a box for withholding agents to report their own GIIN, which may be a way to make sure that payments are not being made through a third party to avoid the FATCA requirements.  The GIIN is a 10-character number, which identifies the FFI specifically for registration purposes.  The GIIN is structured like this:

123456 . 12345 . 12 .123

  • The first six numbers will be alphanumeric and is the FATCA ID.
  • The next five numbers will be alphanumeric and identify the Financial Institution Type.
  • The next two numbers are alpha only and identify the Status Code for the FFI.
  • The last three numbers are only numeric and identify the Country Code.

For countries with an intergovernmental agreement (IGA), the FFIs may have different requirements since they report to their own government, and not directly to the IRS.  It should be noted that many countries have elected to be a part of an IGA to lessen the burden on its own FFIs to deal directly with the IRS.  Also, these IGAs often allow for reciprocal information sharing with the US who will offer information on foreign account holders in US banks.  In any case, it is easy to imagine that the GIIN system will be used and expanded under any type of agreement.

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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:



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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Delays in FATCA Compliance Rules and the Effect on FFIs and Account Holders

May 18th, 2014 No comments

Although FATCA (Foreign Account Tax Compliance Act) was passed in 2010, it has seen numerous delays in implementing the information sharing and reporting requirements that are at its core.  This has given something of a reprieve to foreign financial firms (FFI) who have struggled to adjust to the new information sharing regime mandated by the US government.  US taxpayers that hold foreign accounts also have had more time to evaluate how to handle their investments.

The Dilemma for FFIs Under FATCA

Originally slated to go into effect January 1, 2014, that start date was postponed until July 1 to give FFIs more time to implement internal procedures, understand the IGA (intergovernmental agreement) that may be in place and begin accurate reporting.  The IRS has not been helpful to the FFIs as the guidance offered on reporting has been vague.  The FFIs who report directly to the IRS will be using no fewer than four different forms, all in English, to give account details.  Others will use whatever measures their own governments come up with to meet the standards of an IGA in place with the US.  In either case, it is an administrative headache that has many FFIs divesting themselves of US account holders to avoid the burden of reporting.

Many fully expected another delay as July approached, but instead the IRS gave something of a reprieve to FFIs this month.  They have named the reporting years of 2014 and 2015 as a “transition period” for FATCA where good faith efforts by FFIs to comply will avoid any of the consequences of the 30% withholding on US sourced payments.  In other words, the FFIs have time to sort out how to interpret and use the IRS forms, and as long as they are making an reasonable attempt then the rules will not be strictly enforced.

US Account Holders Given More Time to React

This also seems to affect US account holders with assets over $50,000 held in an FFI.  The FATCA rules penalize non-disclosure with a $10,000 minimum fine, but it appears those penalties may be delayed,  giving account holders time to decide how to structure their offshore investments.  For some, that may mean dividing assets among accounts to avoid the $50,000 minimum, or simply moving into other assets such as real estate or precious metals, which up to this point are not covered by FATCA.

Even if a US citizen avoids the FATCA reporting requirement, they are still required to list foreign accounts under FBAR (Report of Foreign Bank and Financial Accounts), that total in aggregate $10,000 at any point in the reporting year.  This would seem to cover the majority of offshore investors, expats and account holders, who are of continuing interest to the US tax authorities.  FBAR willful violations carry federal criminal tax evasion penalties and minimum civil penalties of 50% of the account’s value, so it is not a requirement one should overlook as a US citizen.

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How IGAs Under FATCA Are Creating a Shortcut to Global Tax Collection

May 18th, 2014 No comments

The widely discussed mandates of FATCA on foreign governments and banks to provide information about US account holders is about to take on a new dimension.  One of the recent outcomes of FATCA has been the advent of intergovernmental agreements or IGAs to facilitate transfer of information from foreign banks to the IRS.

The Beginning of Information Exchange: Model 1 IGAs

The Model 1 IGA allows a foreign financial institution (FFI)to share the account data with its own government, who will then have the responsibility to give it to the US.  Part of that deal is that the US will also share information with that country about any of its citizens banking in the US.  Many countries have signed this type of IGA with the US, and have in effect initiated a global network for policing of bank and financial information that is without precedent.

Previously, agreements of this type were the domain of tax treaties between two countries that carried the weight of other traditional bi-lateral treaties, which often superseded domestic law.  Those treaties were often designed to limit double taxation or resolve other conflicting provisions that might inhibit cross border trade.

The use of IGAs under FATCA mimic this type of treaty, but lack the legal weight of a formal treaty, and in some cases may violate a country’s domestic laws to permit disclosure of account information.  To circumvent this, some countries require US citizens to sign a waiver of privacy rights to open an account in an FFI, rather than test the legality of disclosure under FATCA.

The OECD and Automatic Exchange of Information

This has not stopped the proponents of FATCA from pursuing these IGAs and most recently the Organization of Economic Co-operation and Development (OECD) has gotten on board.  This year the OECD presented a model that called for automatic exchange of information among member countries that is based on the FATCA mandates for account information exchange.  Dubbed a “Global FATCA”, this would be a separate law that would cover member states of OECD, the European Union and the G-20 nations.

Suddenly, it appears there is no longer a need for tax treaties to supersede domestic privacy or banking laws, since the IRS and now OECD have found administrative avenues to shortcut formal legal agreements between nations.  Notions of privacy and financial account security have become the target in a global dragnet to capture tax evaders where ever they may be hiding.  The process of actually negotiating legal treaties among countries would be too slow a process for the tax authorities of cash strapped nations.

Once this network is in place the intergovernmental cooperation will be widespread with only a few hold outs such as China.  A few countries including Australia and Italy have declared plans for tax amnesties for those with undeclared assets, and will give them the chance to avoid penalties if they come forward.  While this may seem generous compared to the no-amnesty rule by the IRS, the objective is the same.  It appears that there is a groundswell of global support for laws that place the collection of unpaid taxes ahead of personal privacy and even traditional international law.

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Types of Intergovernmental Agreements and Their Role in FATCA

May 15th, 2014 No comments

Since it was rolled out in 2010, FATCA (Foreign Tax Compliance Act) has been a topic of controversy among financial institutions, US citizens abroad and foreign countries.  All of these parties are in some way affected by FATCA, its reporting requirements and the consequences imposed by the US government for non-compliance.  Although it was designed to identify potential US taxpayers who may be hiding assets abroad, its broad reach has gone far beyond that original purpose, and it is evolving into a global information network for financial data of all types.

The Burden Of FATCA on FFIs

At first, many foreign financial institutions (FFI) had no intention of complying with what seemed like overreaching by the IRS to hunt down supposed tax cheats.  But gradually it became clear that the US government intended to put enforcement mechanisms behind FATCA that would be difficult to ignore.  FFIs in turn complained to their governments and looked for some support to ease the administrative burden of providing exhaustive account information directly to the IRS.

One by one, foreign jurisdictions began to negotiate intergovernmental agreements (IGA) with the US on how FATCA would be handled.  There were two types of IGAs that emerged, Model 1 and Model 2.   The Model 2 agreement reflects the original FATCA method, requiring FFIs to register with the IRS and sign an agreement to report on US account holders directly to the US.  This is the type many FFIs objected to, and has led to the Model 1 IGA being formed.

Model 1 IGAs and Development of a Global Tax Network

Model 1 is an IGA that allows FFIs to report the FATCA related information to their own government, who would in turn share it with the US.  An FFI that operates through its own government does not need to sign an FFI agreement with the IRS, although they must register.  It is a little hard to believe, but it is beginning to appear that the US government actually has the power to make every bank in the world register with this IRS program, or face financial isolation.

A distinctive element of the Model 1 IGA is that it is reciprocal.  In other words, the US also agrees to share information with the foreign government about account holdings in the US of that country’s citizens.  In effect, FATCA has created a global information network based on intergovernmental cooperation to identify potential tax evaders of any nationality.

Similar to international information sharing programs about criminals and terrorists, the Model 1 IGAs form the basis for identifying any account holder in the world, and sending that data back to their home country.  This would include those working abroad, investors, multi-national corporations or anyone who lives a ‘cross-border’ lifestyle or invests in other cultures.  Just as with airport security, thousands are scrutinized and inconvenienced to locate a suspicious few.   US citizens abroad already report being ‘locked out’ of many FFIs as a reaction to FATCA’s reporting mandates, and those same conditions could start to plague anyone trying to open a bank account outside of their home country.

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Penalties For Non-compliance With FATCA

May 15th, 2014 No comments

One of the hallmarks of FATCA (Foreign Account Tax Compliance Act) is the way it contains enforcement mechanisms and penalties for non-compliance.  Administered by the Internal Revenue Service, there are obvious tax penalties for violations by US citizens, but the enforcement of FATCA’s mandates across international borders targeting foreign financial institutions (FFI) is almost unprecedented.

Penalties and Sanctions for FFIs

Originally many FFIs had no intention of complying with what was seen as providing assistance to the IRS with domestic tax compliance.  If a US citizen were an account holder at an FFI, the customer believed that they were protected from cross border scrutiny and secure within the bounds of any foreign privacy policies to keep their accounts anonymous.  Countries such as Switzerland had build a reputation on banking secrecy, but FATCA was designed to pierce the veil of banking privacy and reveal US account holders and their assets, regardless of location.

Naturally, the US government anticipated some resistance to FATCA, and had prepared an enforcement scheme that was hard to ignore.  First, any FFI that had US account holders was required to share the names and account details with the IRS, otherwise any US-sourced payments to the bank would face a 30% withholding rate.  Any FFI that refused to reveal those names, would be summarily isolated from an international banking system that relies heavily on transactions that pass through the US financial system.

Few FFIs have the capacity to operate in the modern financial world without using the US system at some point, and so the IRS had a big stick behind its back as it sought enforcement of FATCA.  When one player controls the game, it is simple to decide who is allowed to play.  As a result, most countries are negotiating compliance agreements with the US that the FFIs will have to abide by, or face isolation in the global financial network.

Penalties for US Taxpayers

Any US taxpayer that has a foreign account valued at $50,000 must report the fact to the IRS, or face a $10,000 minimum penalty.  That amount can climb to a maximum of  $50,000 in some cases.  In addition, if the account was used to circumvent payment of US income taxes then there would be a 40% surcharge on top of the owed taxes and penalties.  These are some serious fines for even what may be lawful use of a foreign account for either business or personal reasons.   Although one may have paid all taxes owed, simply failing to report the existence of the account brings the $10,000 fine.

These penalties show how serious the IRS is in collecting what it estimates as large sums of unpaid taxes from offshore accounts, and given the spending and debt levels in the United States it is not surprising that they are looking for any source of money available.  What took most people by surprise was the willingness of the US government to leverage its international financial power to bring FFIs and their host countries into line, regardless of whether they liked it or not.  Whether FATCA is a symbol of the US government’s ongoing international overreach, or simple fiscal desperation will only be seen with time.

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FATCA: The Effect of Reporting Requirements on FFIs and US Account Holders

May 13th, 2014 No comments

FATCA (Foreign Tax Account Compliance Act) will go into effect July 1, 2014 and will affect any foreign bank or institution with a US citizen as an account holder.  Likewise, FATCA places a mandate on US citizens to report their off-shore banking and financial activity, or face the serious penalties imposed by FATCA.

Effect on Foreign Financial Institutions

FFIs were the first to react when FATCA was introduced in 2010.  It had become common practice for US citizens to hold assets in foreign accounts, often anonymously.  Some countries had centuries old reputations for banking secrecy, and US citizens seeking financial privacy sought out banks in those jurisdictions.  In some case, those accounts were held for the purpose of evading US taxation, and thus spurred the enactment of FATCA.  Basically, it provides a mechanism to reveal the identity of US citizens holding foreign accounts, using the FFIs themselves as the reporting agents.


At first, many countries and FFIs balked at the idea of becoming an agent for the United States’ tax enforcement policies, and some resisted.  However, a part of FATCA’s power is the sanction of non-compliant FFIs and exclusion from doing business within the US financial network.  In addition, non-compliant FFIs would face a 30% withholding on any US sourced payments to its accounts.  Few foreign countries had the financial or political power to stand up to the US and deny access, and those that did have changed their stance in the past few years as FATCA gained momentum.

The first reaction of some FFIs was to stop accepting new US account holders, and therefore avoid the problem altogether.  Many existing account holders were also asked to find a new location for their assets.  However, some countries began to facilitate agreements with the US to smooth the reporting requirements, and utilize internal reporting protocols rather than requiring FFIs to deal directly with the IRS.

Effect on US Citizens with Foreign Accounts

A US taxpayer must indicate on their tax return ownership of assets in excess of $50,000 at any single FFI.  The minimum penalty for non-disclosure is $10,000, along with a 40% surcharge on unpaid taxes.  But even the US citizen who complies with this requirement was facing ‘lock-out’ from many foreign banks who no longer accepted US account holders.  Despite FATCA’s purpose of uncovering tax evaders, the reach of the strict reporting requirements was affecting many citizens lawfully working or residing in other countries.

Through no fault of their own, US citizens found themselves unwelcome at FFIs due to the zealous efforts of the IRS to impose its tax policies via foreign banks.  The US government is attempting to mitigate some of this resistance by FFIs through negotiation agreements with the host countries, but in many cases the damage has been done, and US account holders are no longer accepted by many foreign banks.  Regardless of whether one is legal resident or investor in a foreign country, FATCA has changed the view of FFIs toward US account holders.

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The Effect of FATCA on the Reporting Requirements of Form 1042-S

May 13th, 2014 No comments

Non-resident aliens such as foreign workers and students are subject to tax withholding when they work in the United States.  The payments made by potential withholding agents (businesses, employers, etc) must be reported on Form 1042-S and submitted to the IRS.  The tax treatment of non-resident aliens is different than for resident aliens, since the latter are taxed as US citizens, but payments still must be reported on the form as US-sourced income.

Even if a payment by a US withholding agent was made to a non-resident for services performed in a foreign country, the 1042-S must report those payments.  Typically, payments of that nature would not be subject to withholding or taxation, but they still must be reported.  This essentially requires any business or institution making payments to foreign workers to document and report the payments, regardless of where the services are performed or if they are taxable.

FATCA And Its Expansion Of 1042-S Reporting Requirements

FATCA (Foreign Account Tax Compliance Act) has effected some changes to the 1042-S reporting requirement.  The primary purpose of FATCA is to identify US taxpayers who hold assets in foreign accounts, and requires those foreign institutions (FFI) to report their names and account holdings.  Otherwise, US sourced payments would be subject to 30% withholding for non-compliance.

Also, the FATCA reporting requirement is being extended to non-financial foreign entities or persons that hold assets in US institutions or receive US-sourced payments, and that information will be reported on Form 1042-S.  Obviously this expansion of FATCA is designed to uncover US citizens whose identities and foreign accounts may be shielded by foreign entities or persons, such as a trust or business partnership.

The Role of the Withholding Agent and Enforcement Under FATCA

Under the new FATCA guidelines withholding agents that would now include US businesses, banks and other financial institutions, must report the holdings and payments to individual non-resident account holders.  These payments may be subject to FATCA enforcement mechanisms including a similar 30% withholding rate, despite the fact that the payments are being made to a non-financial foreign entity.  Under FATCA, the term ‘withholding agent’ includes any person, US or foreign, that makes any type of payment to a foreign entity or person, a very broad class of payer.

This is an interesting evolution of FATCA and it places the reporting burden squarely on the one making the US-sourced payments.  It allows the IRS to track any payment that originates with a US-based payer and is received outside the country.  In essence, the tracking of payments under FATCA now identifies both US citizens and non-residents who receive any type of payment from a US source.  The changes brought by FATCA have also resulted in a new Form 1042-S that will be used for the reporting year 2015 to reflect the July 1, 2014 start date for FATCA mandates.

Anyone who has financial dealings with foreign persons are potentially subject to the reporting and withholding requirements, and should be certain to document those payments or face penalties.  There is a transition period in effect the first two years that will allow ‘good faith efforts’ of compliance to escape any potential penalties for under reporting of payments required by FATCA.

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