Offshore Leaks has been instrumental in bringing back the subject of offshore assets in the forefront of fiscal and finance conversations. The scandal has surely reinforced the importance of proper understanding of offshore reporting per jurisdiction.
The US government usually has the following tools to target tax avoidance by US citizens and residents. The Foreign Bank Account Reporting, commonly known as FBAR and the Foreign Account Tax Compliance Act, commonly known as FATCA.
Why would US citizens or residents hold money or property abroad?
Generally, US citizens and residents working overseas hold bank accounts or property outside of the United States. I have personally also seen immigrants with assets in their previous homeland, or taxpayers whom inherited property from relatives abroad.
Who is required to file Foreign Bank Account Report?
Usually, a US person (meaning individuals, corporations, partnerships, trust or estates) with financial interest in or signature authority over a foreign financial account would be required to file a Foreign Bank Account Report. The typical foreign financial accounts include, among others:
(1) Bank accounts
(2) Brokerage accounts
(3) Mutual funds
(4) Since March 28, 2011 for the 2010 tax year onward:
- Insurances
- Annuities
- Account with brokers or dealers for futures or options
What is the threshold amount for filling an FBAR?
It is currently set at $US 10,000
What would the IRS usually take in consideration to determine a taxpayer’s penalty for failing to file an FBAR?
The Internal Revenue Service will take several factors into consideration to establish penalty for failing to file an FBAR form. They include:
(1) Whether the taxpayer has previously been subject to tax
(2) Whether the taxpayer has previously been penalized
(3) The level of complexity of the tax or compliance issue
(4) The foreign account was established for reasons other than tax avoidance
Is there any relief available for taxpayers who failed to file an FBAR?
The Offshore Voluntary Disclosure Program available since its reopening in January 2012. This program is an effort to get taxpayers who previously failed to file FBARS and report the income related to the foreign account to come forward.
Therefore, a taxpayer who reported all of the income from foreign accounts and paid tax on that income but simply failed to file the FBAR should not use the program. Instead, the failure can be fixed simply by submitting the delinquent FBARs.
So then, what is the Foreign Account Tax Compliance Act reporting? And how is it different from the FBAR?
For U.S. citizens and residents with Specified Foreign Financial Assets, there is a new reporting requirement affecting 2011 and subsequent years. Typical Specified Foreign Financial Assets include:
(1) Any financial account maintained by a foreign financial institution
(2) Stock or securities issued by a foreign person, and
(3) Any interest in a foreign entity held for investment and not held in a financial account
So, are you confused? What exactly are the differences between FBAR and FATCA? Well, turns out, that there are a lot of duplications between the documents. Consequently, there is widespread anger and misunderstanding over perceived IRS unnecessary.
Here are some differences between FBAR and FATCA reporting:
(1) Difference in taxpayer target: FATCA targets US individuals while FBAR targets US individuals, partnerships, corporation, trusts and estates.
(2) Tax v. law enforcement: FATCA was designed more to assist tax administration while the FBAR was designed to aid in law enforcement.
(3) Filing requirements: FATCA needs not to be filed if the taxpayer is not required to file an income tax return. That is not the case for the FBAR.
What is the threshold for filling FATCA?
For US individuals living abroad as a bona fide foreign resident, filing is required if they are:
(1) Unmarried taxpayers (and married taxpayers filling separately) with the total value of specified foreign financial assets of more than $200,000 on the last day of the year or more than $300,000 at any time during the year.
(2) Married taxpayers with the total value of specified foreign financial assets of more than $400,000 on the last day of the year or more than $600,000 at any time during the year.
Filing is required for U.S. citizens and residents living in the U.S. if they are:
(1) Unmarried taxpayers (and married taxpayers filing separately) with the total value of specified foreign financial assets of more than $50,000 on the last day of the year or more than $75,000 at anytime of during the year.
(2) Married taxpayers with the total value of specified foreign financial assets of more than $100,000 on the last day of the year or more than $150,000 at any time during the year.
Has the IRS reached out to foreign banks to implement FATCA?
Many foreign banks are still concerned that the FFI disclosure requirements violate bank secrecy laws. Reports have surfaced that some Swiss banks are shunning their American customers in fear of onerous demands from the IRS on foreign private banks.
Foreign Financial Institutions (FFI) are required to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership. To avoid this filing requirement, the participating FFI will have to enter into agreement with the IRS to:
(1) Identify U.S. accounts
(2) Report certain information to the IRS regarding U.S. accounts, and
(3) Withhold a 30% tax on certain U.S.-connected payments to non-participating FFI and account holders who are unwilling to provide the required information.
In fact, the treasury is creating an online registration system that has been available since the beginning of the year.
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