The federal government implements new rules to fight tax dodgers. As of July 1, 2014, the Foreign Account Tax Compliance Act (FATCA) is in effect. FATCA requires something new of foreign financial institutions: they must now report any assets held by American citizens, U.S. “persons,” U.S. green card holders and individuals holding select U.S. investments to the Internal Revenue Service.
If these foreign banks, insurers, brokerages and funds don’t comply with FATCA, they will be severely penalized: they will be hit with a 30% withholding tax on all payments they get from America.
FATCA isn’t really “new” legislation; it was passed in 2010 as a component of the HIRE Act, and only now has it been implemented. Some investors and economists are worried that it goes too far.
For every action, there is a reaction – and the reaction to FATCA has been major. In 2013, 2,999 expatriate Americans renounced their citizenship or green cards; in most years, only a few hundred do. In Q1 2014 alone, another 1,000+ expatriates followed suit.
That move may seem a bit extreme, but as FATCA does much to discourage foreign banks and brokerages from working with Americans, these individuals felt it necessary.
The Economist reports that “thousands” of the 7 million Americans living abroad have found foreign banks and investment advisors bidding them adieu, not wanting the newfound reporting hassles. While more than 77,000 foreign financial institutions have agreed to comply with FATCA, some are still reluctant. In some nations, domestic privacy laws are tighter than they are in the U.S., bringing up the concern of which nation’s laws to honor first. (FATCA will actually allow the IRS to know more about the foreign assets of U.S. taxpayers than it does about their domestic assets.)
The federal government is cutting foreign financial institutions a bit of slack on top of the four years that have transpired between FATCA’s passage and implementation. As an example, foreign banks have the option to delay enforcement of reporting for two years from July 1 provided they show that they are striving to comply with the new rules.
The Form 8938 requirement must be mentioned. If you are a U.S. citizen with foreign financial assets of greater than $50,000, you must report those assets annually on Form 8938 when filing your 1040 form. (The thresholds are more lenient if you actually reside in another country: $200,000 for single filers, $400,000 for joint filers, and please refer to irs.gov for more details.)
FATCA could bring $800 million a year to the Treasury, but at an aggravating cost. The comply-or-pay command issued to overseas financial institutions disinclines them from working with Americans and is a far cry from the previous “on request” method of gathering tax information. The definition of what constitutes a “U.S. person” is hazy. American taxpayers must still comply with FATCA and its paperwork even if they have paid enough taxes in another country to offset their U.S. income tax burden (which is often the case, and thereby they owe no U.S. income tax). It will also hand the IRS more paperwork to process in a period of severe staffing cuts.
The newly imposed legislation is breeding significant logistical challenges for financial firms, and potential headaches for individual. The IRS notes that investors who fail to comply with FATCA could rack up fines as high as $50,000, and then you have that possibility of 30% withholding on any payments of U.S. source income for account holders. Clearly, Americans who invest and/or reside abroad have much to consider as FATCA takes effect.