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FACTA is Breaking the Barrier Between the IRS and FFI’s

09.09.13 written by

For years, U.S. banks and brokerages (“banks”) have reported to the IRS interest, dividends, and gains and losses of U.S. taxpayer account holders. The IRS cross-references what the banks report against amounts reported by the taxpayer on his Form 1040 Schedules B and D to verify the proper reporting of investment earnings and other income. Foreign financial institutions (FFIs), however, previously had no reporting requirements to the IRS—thus creating a wall between the IRS and the FFI—and leaving the IRS without the ability to make a similar verification of foreign account earnings. As a result, the IRS has begun implementing provisions of the Foreign Account Tax Compliance Act (FATCA), which imposes certain reporting requirements on FFIs and, secondly, requires U.S. individual taxpayers with reportable foreign assets to file Form 8938 with each annual income tax return.  

FATCA was enacted in 2010 for the purpose of preventing tax evasion by U.S. taxpayers who hold offshore accounts and other reportable foreign assets. Earlier this year, the Treasury Department released final FATCA regulations that instruct FFIs on how to satisfy FATCA’s requirements. In general, FATCA requires U.S. financial institutions to withhold, in some instances, a 30 percent withholding tax on payments made to FFIs, which have not entered into intergovernmental agreements (IGAs) with the IRS to report information on their U.S. clients. Accordingly, no withholding tax is due on payments in an IGA country— a  feature that has made the agreements appealing to foreign jurisdictions.

The Treasury Department has delayed enforcement of the FATCA requirements concerning FFIs and their obligations until July 1, 2014. This delay is partially the result of the increased interest by other countries wanting to enter into IGAs. Several countries including Spain, Mexico, Switzerland, Ireland, Denmark, Norway, United Kingdom, and the Cayman Islands have already signed IGAs. FFIs in these countries are now obligated to identify and report their U.S. taxpayer accounts. Notably, Switzerland has taken additional measures and entered into an agreement with the U.S. Department of Justice to allow eligible Swiss banks to pay penalties and disclose U.S. taxpayer-owned account information in order to avoid U.S. criminal prosecution for their roles in helping tax underreporting by U.S. taxpayers.

The implementation of FATCA and the investigations of foreign accounts follows a long line of efforts by the IRS to encourage U.S. taxpayers to disclose their foreign income and assets. In 2006, 2009, 2011, and 2012, the IRS offered the offshore voluntary disclosure programs (OVDPs) that provided taxpayers with undisclosed foreign assets or income an opportunity to report and pay tax on previously unreported income, pay monetary penalties of varying amounts—depending on the applicable OVDP year—and obtain IRS’s agreement against criminal prosecution. KWGD attorneys David J. Lewis and Kristen L. Fitchko have helped many taxpayers both in and outside of Ohio with this disclosure process. The 2012 OVDP is still available, but the IRS cautions that this program could end at any time. These recent developments with FATCA and the OVDP are an undeniable sign of increasing tax transparency with the IRS goal of obtaining third-party reports about U.S. taxpayers who own foreign assets. Recently, Attorney Lewis was asked to review this trend of global compliance and reporting, and summarize his findings in a presentation for the Knowledge Congress Webcast Series. Attorney Lewis collaborated with Attorney Fitchko to create the PowerPoint provided below, which offers additional insight into the Form 8938 reporting requirements and the IRS’s efforts to gather more information about offshore accounts. U.S. individual taxpayers began filing Form 8938 with their 2011 income tax returns and the FFI delay mentioned above does not apply to Form 8938. But, U.S. entities do not yet have to file Form 8938, although that could change at any time.

We encourage you to view the PowerPoint and contact us with any issues or concerns you may have regarding FATCA, Form 8938, OVDP, or any foreign asset reporting issue. Attorney Lewis can be reached as follows: Attorney David J. Lewis 50 South Main St., Akron, Ohio 44308 ph: 330-436-5300  fx: 330-535-4809.

We hope you find the PowerPoint of interest and help. Thank you.