Although FATCA was passed several years ago, the repercussions are now starting to take shape. As FATCA continues to gain momentum, the laws under FATCA will change the way the world does business and taxes are enforced. There are three main components to FATCA; intergovernmental agreements, voluntary reporting, and taxpayer obligations.
Intergovernmental Agreements (IGA)
As part of FATCA, the U.S. has entered into many IGAs with other countries. These IGAs contain agreed-upon terms whereby certain information will be shared between the U.S. and the foreign country related to the activities of citizens or residents. Therefore, U.S. citizens and residents with bank accounts in foreign countries with an IGA will have their information reported to the U.S. government. This further increases the need for U.S. citizens and residents to be sure they are in compliance with all filing and reporting obligations.
Voluntary Reporting by Foreign Financial Institutions
Despite an increasing network of IGAs, the IRS was aware the application of the IGAs could be slow, difficult, or in some cases an IGA may not be reached. To combat these potential issues, foreign financial institutions have been incentivized to voluntarily report the activities of U.S. citizens and residents. Foreign financial institutions who choose not to perform this reporting may be subject to a 30% tax on payments / income received from the U.S. In order to avoid this heavy cost of doing business in the U.S., foreign financial institutions around the world are agreeing to register with the IRS and report U.S. citizen and resident account holders. Therefore, you need to understand that because of this reporting, whether your country has an enforced IGA may not be relevant.
The impact of FATCA on taxpayers is felt not only through this reporting by foreign financial institutions. Taxpayers have direct reporting obligations as well. FATCA has created Form 8938, which requires reporting of certain foreign investments, assets and bank accounts. Form 8938 is very similar to the Foreign Bank Account Report (FBAR), but is more extensive and is filed with a taxpayer’s annual income tax return. Therefore, this information is sent directly to the IRS and can be used for analysis of tax returns and reporting. Despite only being an informational form, the Form 8938 is a very important piece of the tax return.
Additionally, taxpayers should expect to receive more frequent requests for completion of forms such as W-9, W-8BEN and W-8BEN-E as more financial institutions comply with the laws of FATCA. Financial institutions use these forms to determine which clients must be reported to the IRS. Although these are informational forms, they are signed under penalty of perjury and failure to give them the proper attention can have significant consequences. Our professionals at Hone Maxwell LLP have experience dealing with the reporting requirements and consequences of FATCA.