Foreign Account Tax Compliance Act (FATCA)

FBAR/FATCA Compliance

Foreign banks from around the world are sending letters to account holders that they believe have, or had, a U.S. tax nexus (or other U.S. connection) requesting information to determine whether such account holders have disclosed their foreign bank accounts to the Internal Revenue Service (“IRS”). The letters from foreign banks generally require an account holder to disclose whether the account has been declared to the IRS through the filing of a Report of Foreign Bank and Financial Accounts (commonly known as the “FBAR”) form and/or a Form 1040 personal income tax return, participation in the various IRS Offshore Voluntary Disclosure Programs, or otherwise. Sometimes foreign banks request that the account holder submit an IRS Form W-9, which is generally required to be completed by U.S. account holders for tax reporting purposes.

The Foreign Account Tax Compliance Act (“FATCA”), a law enacted by Congress in 2010 and effective beginning July 1, 2014, is intended to identify noncompliance by U.S. taxpayers using offshore accounts. Under FATCA, foreign financial institutions will generally be required to comply with certain due diligence and annual reporting requirements regarding their U.S. account holders and enter into information sharing agreements with the United States. Foreign financial institutions that do not provide such information to the United States will face a stringent penalty—withholding of 30 percent of certain U.S. source payments such as interest and dividends.

Many U.S. taxpayers are receiving these letters because, in advance of the effective date of FATCA, foreign banks are undertaking the process of identifying account holders that have a U.S. tax nexus. A foreign bank may find that a taxpayer has a U.S. tax nexus through indicia such as having a phone number affiliated with an account that appears to be U.S.-based or a U.S. mailing address. If a foreign bank has identified an account as potentially having a U.S. tax nexus, the foreign bank is likely to send a letter to the account holder requesting the information discussed above. 

Discussion of Law:

U.S. citizens, U.S. individual residents, and a very limited number of nonresident individuals

who own certain foreign financial accounts or other offshore assets (specified foreign financial assets) must report those assets on Form 8938 and attach it to their income tax return, if the total asset value exceeds the appropriate reporting threshold.

The reporting requirement for Form 8938 is separate from the reporting requirement for the FinCEN Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”) (formerly TD F 90-22.1). An individual may have to file both forms and separate penalties may apply for failure to file each form.

Sources:

//www.blankrome.com/index.cfm?contentID=37&itemID=3249

//www.irs.gov/Businesses/Corporations/Foreign-Account-Tax-Compliance-Act-FATCA