All U.S. citizens, green card holders and resident aliens who have foreign bank/financial accounts that in total exceed $10,000 per year, are required to file Treasury Form TDF 90-22.1 — the Foreign Bank Account Report — each year. In addition, all income attributable to the foreign accounts must be included on the person’s U.S. income tax return.
Much has been written in recent years about the large amount of overseas bank/financial accounts that are owned by U.S. persons where the income in these accounts is not being reported on individual income tax returns and no U.S. tax is being paid. As a result of this, in 2009, the U.S. government put tremendous pressure on the Swiss government to force UBS to release the names of 14,700 U.S. persons who had accounts with the Swiss banking giant.
This led to the US governments first voluntary disclosure program which closed on Oct. 15, 2009. It has been reported that more than 15,000 took advantage of this program by filing amended returns for 2003-2008, paying all taxes related to the foreign bank income, paying accuracy penalties as well as a one-time penalties — 5 or 20 percent — on the highest value in the account during this time period.
The success of this program has led the U.S. government to initiate a second voluntary disclosure program for the 2003-2010 time period with similar penalties, except that the maximum penalty on the highest value has been increased to 25 percent. This program closes on Aug. 31, but persons who enter the program timely, can ask for a 90-day extension period.
As a direct result, Section 501 of the Hiring Incentives to Restore Employment (HIRE) Act was signed into law on March 18,2010, and its provisions related to U.S. withholding tax and information reporting is commonly referred to as the Foreign Account Tax Compliance Act , or as it is commonly known in the tax profession, the FATCAT Act. In essence, FATCA was designed to improve tax compliance in the foreign income area. In an attempt to improve the foreign compliance, Congress and Treasury are using a two-pronged approach to the problem.
First, in addition to the aforementioned FBAR reporting, if the aggregate value of all “specified foreign financial assets” held by a U.S. person exceeds $50,000 per year, certain information will be required to be included on their income tax returns. Specified foreign financial assets include any foreign depository, stock or other asset maintained in a foreign financial institution. Failure to make this disclosure will result in a minimum penalty of $10,000 yearly. A 40 percent penalty will be imposed on any understatement of tax attributable to these foreign financial assets that are required to be disclosed.
Secondly, the act places substantial compliance responsibilities on all foreign financial institutions. All such institutions will be asked to enter into an agreement with the IRS which requires them to identify all U.S. accounts and report certain information. Institutions that do not comply will have a 30 percent gross withholding tax imposed on all “withholdable” payments from U.S. sources such as dividends, interest and gross proceeds on securities sales. Foreign entities that are not financial institutions will not be required to enter into an agreement, but must certify that they have no owners holding 10 percent or greater shares or disclose the identity of such U.S. owners to the IRS. Failure to comply will also subject them to the above 30 percent withholding.
As a result of this, a foreign financial institution has three options:
• It can agree to comply;
• It can opt to have no U.S. customers;
• It can cease to have any investment holdings in U.S. securities. This third option would no doubt require the FFI to make major changes in its investment strategy to eliminate investment in US securities.
Treasury Notice 2011-53 provides the timetable for the above to be implemented. A foreign financial institution must enter an agreement with the IRS by June 30, 2013, to be assured it will be deemed a participating institution. Withholding on U.S. source dividends and interest paid to non-participating institutions will commence Jan. 1, 2014. Withholding on all withholdable payments including gross proceeds will be fully phased in on Jan. 1, 2015
The IRS is planning to issue regulations by the summer of 2012, recognizing the practical difficulties of implementing certain aspects of FACTA and has acknowledged that these new provisions may require coordination with a number of foreign governments.
Wayne Holton is a partner at Citrin Cooperman, a regional accounting, tax, and consulting firm with offices in Stamford. Reach Holton at www.citrincooperman.com.
