The new Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation…
Form 8938, FATCA, FBAR and penalties for all (including bankers)
The IRS and US Treasury have stepped up their efforts toward tracking down delinquent tax payers and enforcing payment of overdue taxes. One of these initiatives is the “Foreign Account Tax Compliance Act”. FATCA is part of the Hiring Incentives to Restore Employment (HIRE) Act, which was designed to enforce higher tax compliance among U.S. taxpayers with foreign accounts and assets. FATCA created Form 8938, an additional foreign account reporting requirement over and above the Report of Foreign Bank and Financial Accounts (FBAR) or Form TD F 90-22.1 that needs to be filed with the U.S. Treasury every year. If a taxpayer has more than a certain amount of foreign assets, Form 8938 is included as part of their annual 1040 filing and requires reporting an expanded list of foreign assets not covered by FBAR.
How FATCA Will Affect Me?
The purpose of the FATCA is to force managers of foreign financial institutions to report all American clients to the IRS or be severely penalized with high withholding taxes. If the information reported is not 100% accurate and complete, the foreign banker will still be faced with a penalty. This rule, however, is not without complications:
Some countries have data protection laws in place that would be if the manager cooperates with the IRS.
A foreign banker may not realize that he has an American client because the client is represented by a non-American.
The client may not provide the manager with the required information.
The penalty is solely applied to the manager, not the American client, regardless of the manager’s nationality. As you see, a American client may be more trouble than he is worth.
Why Should Foreign Bankers Comply?
You may wonder why a foreign banker would cooperate with the IRS even though they do not (most of them) have any ties to the US government. The answer is simple: the penalty. Foreign bankers feel obligated to register because the American financial markets are the largest in the world. Bankers will need to eventually process payments through the US financial system.
“The law requires that foreign financial institutions (a category that seems to include everybody from financial advisers to pension funds) register with the Internal Revenue Service by June 30th 2013. If they do not register, they will then be regarded as “non-participating”. In that case a 30% withholding tax will be applied to all their income on American assets from 2014 as well as to the proceeds from the sales of these assets from 2015.”
Bankers who fail to cooperate with US government will be subject to punitive 30% tax.
Can Americans Invest Abroad with FATCA in Place?
FATCA may cause foreign bankers to deal differently with American clients if it goes through congress unchanged. It is in the best interest of international financial institutions (and, thusly, American investors) that the initiative will be adjusted in such a way that foreign bankers can continue to work with American clients. Currently, the steep withholding taxes will force many international fund mangers to deny Americans or avoid all American assets, which puts both at a disadvantage. Many foreign banks are lobbying the US Congress to change FATCA or FATCA regulations.
In the meantime, beware that FATCA is the law and will be implemented over the next 1-2 years. Our law firm expects unabated aggressive enforcement of the US tax laws, including increased criminal prosecutions and civil audit examinations. We have been advising our clients to expect the unexpected (and the worst) in their tax treatment and disclosure of offshore assets.
Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign accounts.