What Is FATCA and How Does It Affect You?

The Foreign Account Tax Compliance Act represents U.S. efforts to combat tax evasion by people holding investments in accounts outside the U.S.

Under FATCA, foreign financial institutions (such as banks, hedge funds, pension funds, and insurance companies) are required to report to the U.S. tax authorities — the IRS — certain information about foreign accounts held by U.S. taxpayers. Also included in the reporting requirements is any substantial ownership in a foreign entity by U.S. taxpayers.

The information will come to the IRS through banks. U.S. citizens have to pay taxes on their worldwide income. If the aggregate value of your foreign accounts exceeds $10,000, you have to report this on a special form called the FBAR, which has to be e-filed before June 30 of the following tax year.

How am I impacted?

U.S. taxpayers with foreign assets such as financial accounts, securities or interests in foreign entities with an aggregate value of more than $50,000 also need to fill out Form 8938, which needs to be attached to annual income tax returns.

If you have signatory rights over a foreign account — such as a bank account, brokerage account, mutual fund, trust, or pension plan — this information needs to be reported to the IRS via an FBAR by e-filing it.

Banks ask their U.S. clients to sign Form W-9, which asks U.S. citizens to provide their ID number and other personal information for tax purposes. The information goes to the IRS, which checks to see if the U.S. citizen with the foreign account has complied with his or her tax duties. If there is no signature on Form W-9, the bank can freeze the account.

What if I do not comply?

Not complying with U.S. tax or FBAR reporting duties can be considered a criminal offense in addition to a civil one. If you haven't filed an FBAR, the civil penalty can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign account that's in violation.

Criminal penalties can be harsh. If a tax return isn't filed, a prison term of up to one year and a fine of up to $100,000 are meted out. Failure to file an FBAR can lead to prison terms and criminal penalties of up to $500,000.

A better way.

A better strategy is to participate in the Offshore Voluntary Disclosure Program or in the Streamlined Filing Compliance Procedure. The OVDP process lets U.S. citizens voluntarily report previously undisclosed foreign accounts and assets. It can take a year or two for the IRS to close a file, but criminal prosecution will be avoided. You'll need to submit income tax returns and FBARs for the past eight noncompliant years.

The Streamlined Filing Compliance Procedure is for nonresident U.S. taxpayers who haven't filed a U.S. tax return. Delinquent tax returns need to be filed for the past three years; FBARS for the past six years. If the IRS agent accepts the case, penalties and follow-up actions may be skirted. Even the FBAR penalty may be waived. This procedure is shorter and less painful on the wallet, but it puts the U.S. citizen at the mercy of the IRS — which may or may not take the case in the first place.

Have questions?

If you're a U.S. citizen with undisclosed foreign accounts, assets and income, realize that foreign banks are under lots of pressure to identify their U.S. clients to U.S. authorities, so compliance is a smart move.

Reach out to us with your international tax questions.