Nirmit Mehta
1. Introduction to FATCA
The United States Federal Government enacted FATCA in 2010, requiring US persons to annually report themselves and their foreign financial accounts to the US Treasury. It further requires all Foreign Financial Institutions (FFIs) to provide US treasury with the information regarding assets and identities of USA persons held by them. This article covers the consequence of applicability of FATCA to US persons.
2. FATCA for Individuals
Introduction
The following are the US Persons:
1. U.S. citizens;
2. U.S. resident alien;
3. Nonresident alien who makes an election to be treated as resident alien for the purpose of filing joint income tax return and;
4. Nonresident alien who is bonafide resident of American Samoa or Puerto Rico
Where the above persons have an interest in specified foreign financial assets, they are required to report those assets in Form 8938. Such Form is to be furnished along with annual income tax return. Reporting of specified foreign assets must be reported even if none of the assets affects the taxpayer’s tax liability for the year.
Specified foreign financial assets
Specified foreign financial asset means:
1) any financial account (as defined in section 1471(d)(2)) maintained by a foreign financial institution (as defined in section 1471(d)(4)), and
2) any of the following assets which are not held in an account maintained by a financial institution (as defined in section 1471(d)(5))—
(A) any stock or security issued by a person other than a United States person,
(B) any financial instrument or contract held for investment that has an issuer or counterparty which is other than a United States person, and
(C) any interest in a foreign entity (as defined in section 1473).
Financial Account means:
1) any depository account maintained by such financial institution,
2) any custodial account maintained by such financial institution, and
3) any equity or debt interest in such financial institution (other than interests which are regularly traded on an established securities market).
4) Any equity or debt interest which constitutes financial account under 3) above
Financial institutions means an entity which:
1) Accepts deposits
2) as a substantial portion of its business, holds financial assets for the account of others
3) is engaged (or holding itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities (as defined in section 475(c)(2) without regard to the last sentence thereof), partnership interests, commodities (as defined in section 475(e)(2)), or any interest (including a futures or forward contract or option) in such securities, partnership interests, or commodities.
A foreign financial institution means a financial institution which is a foreign entity.
Foreign entity means any entity which is not a United States Person
Who is exempted from FATCA
Taxpayers, living in the US, with a total value of specified foreign financial assets below a certain threshold do not have to file Form 8938:
1) If the total value is at or below $50,000 at the end of the tax year, there is no reporting requirement for the year, unless the total value was more than $75,000 at any time during the tax year( also applies when married taxpayers, filing separate income tax return)
2) In case of married tax payers, filing joint income tax return, if the total value is at or below $100,000 at the end of the tax year, there is no reporting requirement for the year, unless the total value was more than $150,000 at any time during the tax year
Tax payers, living outside US and has presence abroad:
1) If the total value is at or below $200,000 at the end of the tax year, there is no reporting requirement for the year, unless the total value was more than $300,000 at any time during the tax year( also applies when married taxpayers, filing separate income tax return)
2) In case of married tax payers, filing joint income tax return, if the total value is at or below $400,000 at the end of the tax year, there is no reporting requirement for the year, unless the total value was more than $600,000 at any time during the tax year
A Tax payer may have a presence abroad if:
1) A US citizen who has been a bonafide resident of one or more foreign countries for an uninterrupted period i.e. an entire tax period or
2) A US citizen or resident who is present in one or more foreign countries for atleast 330 full days during a period of 12 consecutive months, ending in the tax year.
If no income tax return is required to be furnished, there is no requirement to file Form 8938, even if the value of specified foreign asset is more than the threshold limit.
What is not required to be reported
Following financial accounts and assets are not required to be reported:
1) A financial account maintained by a US Payer i.e. a domestic financial institution. It also includes domestic branch of foreign bank or foreign insurance company. Further, it includes foreign branch or foreign subsidiaries of US financial institutions.
2) A financial account maintained by dealer or trader in securities or commodities if all the holdings in the account are subject to the mark-to-market accounting rules for dealers in securities or an election under section 475(e) or (f) is made for all the holdings in the account.
3) Asset, which is not held in financial account, is not required to be reported if such asset is subject to the mark-to-market accounting rules for dealers in securities or an election under section 475(e) or (f) is made for the asset.
Valuation of Specified Foreign Asset
In Form 8938, maximum value of the specified foreign asset is required to be reported. In most cases the value of the specified foreign asset is its fair market value. Appraisal by third party is not required to estimate maximum fair market value. If the asset is denominated in foreign currency during the tax year, the maximum value of the asset must be determined in the foreign currency and then in US dollars
US Treasury Department’s Financial Management Service foreign currency exchange rate for purchasing US dollars must be used. If no such rate is available, publicly available foreign currency exchange rate must be used. The currency exchange rate on the last day of the tax year is to be used to determine the maximum value of a specified foreign asset.
The above rate is to be used even when the foreign financial asset has been sold or disposed of before the last date of the tax year.
Exceptions to reporting
An asset is not required to be reported in Form 8938 if it is reported in following forms that is timely filed with the IRS in the same tax year:
1) Form 3520-Annual return to report transaction with foreign trust and receipt of foreign gifts.
2) Form 5471- Information return of US persons with respect to certain foreign corporations.
3) Form 8621- Information return by a shareholder of a passive foreign investment company or qualified electing fund.
4) Form 8865-Retun of US persons with respect to certain foreign partnerships.
Penalties
Failure to file Form 8938 invokes $10,000 penalty. On failure to file Form 8938 within 90 days after the IRS mails the notice of failure to file the Form, an additional penalty of $10,000 for each 30 day period after 90 day period has expired and failure to file Form 8938 continues.
No penalty if reasonable cause is shown.
If underpayment of tax is as a result of undisclosed foreign financial asset, penalty equal to 40 per cent of that underpayment shall be imposed. In case of fraud, 75 per cent of the underpayment shall be paid as penalty. The tax payer may also be subject to criminal penalties, in case of above defaults.
Statute of Limitations
On failure to file Form 8938 or failure to report specified foreign financial asset, the statute of limitations may remain open until 3 years from the date of filing Form 8938.
3. FATCA for non-individuals
Coming soon
The IRS anticipates issuing regulations that will require a domestic entity to file Form 8938 if the entity is formed or availed of to hold specified foreign financial assets and the value of those assets exceeds the appropriate reporting threshold.
Until IRS issues such regulations, only individuals must file Form 8938.
Report on Foreign Bank and Fianancial Accounts (FBAR)
United states persons are required to file FBAR if:
1) the United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and
2) the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported.
United States person includes U.S. citizens; U.S. residents; entities, including but not limited to, corporations, partnerships, or limited liability companies, created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.
(Author can be reached at nirmit.mehta@kcmehta.com)
Nice article. Thanks for sharing.