By Ryan Losi, CPA
The Foreign Account Tax Compliance Act (FATCA), which took effect last tax season, is the United States’ latest effort to increase tax compliance involving foreign financial assets and offshore accounts.
Under FATCA, U.S. taxpayers with specified foreign financial assets that exceed certain modest thresholds must report those assets to the U.S. Internal Revenue Service, along with detailed information including the specific type of asset, date acquired, income derived from the asset and fair market value (FMV), even if illiquid, and more.
This information is reported using IRS Form 8938 (PDF), which taxpayers attach to their federal income tax return, beginning this tax filing season. The penalty for failing to report specified foreign financial assets for a tax year is $10,000. However, if this failure continues for more than 90 days after the day on which the IRS mails notice of the failure to the individual, additional penalties are assessed — $10,000 for each 30-day period, or fraction of the 30-day period, during which the failure continues after the expiration of the 90-day period, with a maximum penalty of $50,000.
Foreign financial institutions are now required to report directly to the IRS information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest, even if it means breaking their own privacy laws.
Those who have assets located outside the United States and those of us professionals who serve this clientele know that we have seen nothing but increased regulation, increased penalties (both civil and criminal) and increased enforcement over the last decade. Legislators and regulators are convinced that the amount of unreported assets and income abroad from U.S. taxpayers is so substantial that they are willing to enact and enforce these draconian measures. Only time will tell if they are successful.
The hypocrisy of all this is that while the United States continues playing world police and tax collector using a burdensome, overly complex and repressive tax regime for its citizens and green card holders, it continues to be the No. 1 tax haven for the world itself. That secret is now getting out.
Unlike U.S. citizens and green card holders, foreign nationals or nonresident aliens who have U.S. bank deposits earn interest which is tax-exempt in the United States and is not required to be reported back to anyone. There are still a lot of people in the world who still see the U.S. dollar as a strong currency and a safe place to park money. And the fact that it is not reportable to any authority and is exempt from U.S. taxation causes a lot of capital to flow to the United States. Even more interesting is that “portfolio interest,“ such as income from bonds, is also tax-exempt for these same investors and follows the same rules as bank deposits.
One can only wait until other countries, the same ones the United States is so concerned that hold our taxpayers’ offshore assets, come calling to request the same in return for their taxpayers. Where will the capital flow then? Will the United States be so aggressive with its offshore enforcement programs then? Time will tell. In the meantime, the United States continues to aggressively search for more tax revenue to feed its out-of-control spending habit.
Ryan L. Losi CPA, is a partner and executive vice president of Piascik & Associates, P.C., providing domestic and international tax services to a broad range of clients throughout the United States and abroad. Losi leads the firm’s international tax practice, advising clients in numerous countries spanning five continents. He can be contacted at Piascik & Associates by phone (877) 527-2046 or email .Tweet
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