By Heidi Stephens
Expats have been required to file FBARs for several years. Current US Department of Treasury guidelines for FBAR filings go back to 2006. Now In 2014 not only do expats have to file their FBARs in addition to their Federal tax returns (more on this at the end of this article), but taxpayers will also have to evaluate whether their offshore financial institution will comply with FATCA. If you don’t report via FBAR and your foreign financial institution complies with FATCA not only are their problematic reporting issues and hefty penalties but it could be considered to be willfully negligent on your part and this is a criminal offense.
FATCA, or Foreign Account Tax Compliance Act, was set in place by the US Federal Government to battle offshore tax evasion. It forces financial institution from the Azores to Zimbabwe and everywhere in between to identify essentially all US taxpayers such as US citizens, green card holders, dual nationals and people with “substantial” presence in the US among their customers, and expects them to report these findings to the IRS (Department of Treasury).
These international banking and other financial institutions (brokerage, insurance, etc.) are supposed to report not only names and addresses of US citizens (US taxpayers), but also account numbers and monetary amounts in foreign accounts. These filings are to occur on individuals with over $50,000 US dollars and couples with earnings of over $100,000 US dollars in their bank accounts. This law also states that the US government can contact a foreign financial institution to request any additional information it wants to see about the offshore institutions client.
The US government is banking on most international financial institutions to comply with the law, because those who do not are subject to a 30% charge on US-sourced or based income. Considering there are estimated to be between 3 to 7 million American Expats, the US government could bring in a nice chunk of change. However, there are concerns that FATCA does not take into account if someone is a dual citizen (foreign account is registered under foreign identification), or perhaps not even a US citizen at all, in cases of those classified as having a “substantial” presence in the US. These could simply be people who are seeking the warmer weather the US has to offer in certain locations in the wintertime.
To clarify for the confused: assuming you qualify and meet the threshold for FBAR and FATCA reporting – here are the 3 steps you and your foreign financial institution take.
STEP 1 You: IRS Federal 1040 Tax Return – You need to report ownership of foreign accounts on your Schedule B. In addition if you meet the reporting threshold you will be required to also file Form 8938 (Statement of Specified Foreign Financial Assets).
STEP 2 You: FBAR known as Form TD F 90-22.1 – Every account you sign on, whether it is yours or not and whether it is a personal or business account needs to be reported (based on the highest daily balance when added together of all accounts is $10,000 or more). Anyone that co-signs on the account (for instance a jointly owned account) is reported as well. All accounts that were opened during the tax year even if the balance is “0” needs to be reported. Real important: you do not file your FBAR with your Federal tax return to the IRS. FBARs are filed with the US Department of Treasury. New effective end of June 2013, FBARs can only be filed on line. This means you need to register with the FINCEN BSA website (FINCEN: US Dept of Treasury Financial Crimes Enforcement Network / BSA: FINCEN’s Bank Secrecy Act)
STEP 3 Your Foreign Financial Institution: FATCA – requires foreign financial institutions (banks, brokers, insurance companies, etc) to report all US citizens and US tax payers to the US Federal Government.
Only time will tell is countries and their financial institutions obey the new US law. Many foreign banks are asking US clients to close their accounts and will not open new accounts for US taxpayers. Since FATCA registration begins this month, it should not be long before we know if both expats and foreign financial institutions will take this law seriously.