The U.S. Tax Cuts and Jobs Act enacted in December 2017 greatly changed the U.S. tax code. What’s the one thing it didn’t change? The Foreign Account Tax Compliance Act. Read on to learn about FACTA filing requirements, the history of the law, and when to file FACTA.
FATCA first went into effect in 2010 and remains a fact of life for individuals with foreign assets. Here’s a primer on what U.S. individuals with foreign interests need to know about FATCA.
How does FATCA Affect Individual U.S. Taxpayers?
- a U.S. person is required to report, depending on the value, foreign financial accounts and foreign assets regardless if the accounts or assets produce income. And, for foreign assets, regardless of their percentage of ownership interest.
- A foreign financial institution (FFI) is required to report on the foreign assets held by its U.S. account holders or be subject to a 30% withholding on their income and the income of their customers.
FATCA Filing: A Brief History of the Law
In 2010, the U.S. Congress cracked down on U.S. taxpayers it suspected of hiding assets overseas and improperly shifting income to tax shelters. The result was the Foreign Account Tax Compliance Act (FATCA), a law designed to identify foreign assets held by U.S. citizens and then collect tax on the income derived from said assets. It was passed as the revenue-raising component of the Hiring Incentives to Restore Employment (HIRE) Act, also known as the 2010 Stimulus Bill.
FATCA was a significant change in how the U.S. government treated individuals, offshore trusts, and foreign financial institutions. But how has it worked out? Pretty darn well, according to the IRS.
“The IRS has passed several major milestones in their efforts of identifying U.S. taxpayers with offshore accounts and assets, collecting back taxes, and getting taxpayers to come into compliance.” In an October 2016 release by the IRS, Commissioner
John Koskinen said, “As we continue to receive more information on foreign accounts, people’s ability to avoid and evade tax becomes harder and harder.”
FATCA Requirements: What Individuals Need to Know
To ensure taxpayers are compliant, it may be necessary to complete several forms (and include any trusts they’re affiliated with.)
- U.S. persons holding foreign financial assets with an aggregate value exceeding $50,000 must disclose those assets on FATCA Form 8938, Statement of Specified Foreign Financial Assets. Form 8938 gets attached to their annual income tax return. (Note: specific requirements depend on a taxpayers’ filing status.)
- Individuals with a foreign trust, trust must file a Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner. Annual information reporting requirements are due March 15 (not April 15, which is the normal individual filing deadline) in order to be compliant.
The FACTA Risk Factor
One of the IRS’ top priorities is to enforce the rules relating to the reporting of foreign assets and accounts — regardless if they produce income.
- The beginning minimum penalty for non-disclosure or late disclosure is $10,000 per asset or account and can be as high as 50% of the value. Criminal penalties can apply if non-compliance continues and is willful.
For foreign trusts the penalties can be as high as 25% of the value of the trust or 35% of the value of the distribution(s) made.
The number of international account and asset disclosures is on the rise by U.S. taxpayers. According to the IRS, the number of information returns filed by foreign trusts doubled between 2010 and 2014 —jumping from 7,051 returns in 2010 to 14,140 returns in 2014 (the most recent year available).
Why the uptick? Partly, it’s a byproduct of FATCA. But it’s also likely that after years of confusion, more and more individuals are aware of their obligation to file. FATCA is notoriously broad, and unless U.S. persons control all of the substantial decisions (including some that are considered minor) a trust can be considered a foreign trust.
- It’s easy for an individual to mistakenly think that their trust is a domestic trust merely because it was established under U.S. law.
If a trust established under the law of a U.S. State gives substantial decisions to foreign persons, it may still be considered a foreign non-grantor trust. In that case, the trustee is required to give special disclosure or face significant penalties, as noted above.
U.S.-directed trusts are very popular with persons from civil law jurisdictions because of the ability to have the trust decisions allocated to persons of the settlor’s (person establishing the trust) choice. Note: U.S.-directed trusts can easily be treated as a foreign non-grantor trust, requiring special disclosure rules.
FACTA Applies to Who? People (and Things) FATCA Affects
As you can see there is a lot at stake for non-compliance. The IRS and U.S. courts rarely consider ignorance of the law as an excuse.
Broadly speaking, the U.S. government states FATCA applies when:
- A U.S. “Person” (U.S. citizens, residents, and entities organized under U.S. law, domestic estates and trusts) has foreign financial accounts and assets — regardless if such accounts and assets produce income.
Some exemptions to FACTA filing include:
- Publicly traded corporations (including the affiliated group)
- Captive insurance companies
- 501 tax-exempt organizations and charitable trusts
- Retirement plans
- Governmental organizations and many U.S. financial organizations
We hope this information has been helpful. For a more in-depth discussion or consultation, contact IWTA’s Founder, Jack Brister.
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