Are You Ready For New FATCA Enforcement in 2020?

Banks and certain other financial institutions located outside the United States that have U.S. account holders are scrambling to meet a looming IRS deadline. These institutions, known as foreign financial institutions, or FFIs, must achieve full compliance with the U.S. Foreign Account Tax Compliance Act (FATCA) by January 1, 2020. As a result, U.S. persons with assets in foreign accounts may now see those accounts closed or frozen.

FATCA

FATCA is a U.S. federal law that aims to prevent U.S. corporations and individuals from hiding assets in foreign U.S. accounts for the purposes of avoiding or evading paying U.S. taxes. Specifically, FATCA requires U.S. persons with foreign financial assets to report those assets to the Internal Revenue Service and/or U.S. Treasury each year. It also requires FFIs to report identifying information about their U.S. account holders to the IRS. Failure to comply can result in high penalties, account freezes and, in extreme cases, criminal prosecution. Under FATCA, FFIs have been asked to collect the following information about their U.S. account holders and report it to the IRS:

• The name, address and Taxpayer Identification Number (TIN) of each account holder and, in the case of any account holder which is a United States owned foreign entity, the name, address, and TIN of each entity owner
• The account number
• The account balance
• Gross dividends, interest and other income paid or credited to the account

End of FATCA grace period

Due to the difficulty of collecting the information above, in particular, account holders’ TINs, in 2014 the IRS granted FFIs a three-year grace period to achieve full compliance. During the grace period, FFIs have been required to provide their U.S. clients’ TINs only if the FFI already had a record of them. FFIs were also required to ask each U.S. client for their TIN every year, and to make electronic searches for those that were missing.

The grace period comes to an end on December 31, 2019. Beginning in 2020, FFIs will be required to provide TINs for all their U.S. clients. Failure to do so may result in an FFI incurring a 30 percent withholding tax on all income streams from their U.S. investments. FFIs are now understandably intensifying their efforts to obtain the missing TINs of their U.S. account holders. A U.S. person or corporation that fails to comply with an FFI’s request for their TIN must provide a reasonable explanation to the FFI or risk having their accounts frozen.

Providing a U.S. TIN and other information to your FFI may not be the only reporting requirement for U.S. persons and corporations that hold assets outside the U.S. U.S. persons holding foreign financial assets with an aggregate value above a certain threshold must report those assets on Form 8938, Statement of Specified Foreign Financial Assets, which must be filed annually with the IRS as part of their annual tax return.

It’s important to note that Form 8938 is separate from the reporting requirement regulated by the Financial Crimes Enforcement Network (FinCEN). U.S. persons and corporations that hold assets outside the U.S. with an aggregate value above a certain threshold must report those assets on form 114a, Report of Foreign Bank and Financial Accounts (FBAR). An individual may have to file both forms and could be subject to separate penalties for failure to file either of them.

FBAR and Form 8938 compliance is strongly recommended because the failure to comply can result in high penalties, account freezes, and criminal prosecution.  If US persons are non-compliant with their foreign asset and income tax form reporting requirements, they should consider getting qualified tax legal advice and considering applying to one of the IRS’ voluntary disclosure programs.

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