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Financial Institutions Must Identify
U.S. Customers
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In the face of mounting pressure from banks and other financial institutions in Canada and around the globe, the U.S. recently delayed until 2014 some of the reporting requirements of its new the Foreign Account Tax Compliance Act (FATCA).
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Reporting Foreign Financial Assets
FATCA requires any U.S. person holding foreign financial assets with an aggregate value exceeding $50,000 to report certain information about those assets on a new form (IRS Form 8938) that must be attached to the taxpayer's annual tax return. Reporting applies for assets held in taxable years beginning on or after January 1, 2011.
Failure to report foreign financial assets on the form will result in a penalty of $10,000 (and a penalty up to $50,000 for continued failure after IRS notification). Further, underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40 per cent.
If you have questions about reporting foreign financial assets, contact your accountant.e legislation forces non-U.S. banks to identify and report information about their U.S. customers to the Internal Revenue Service (IRS). The law is an attempt to target non-compliance by U.S. taxpayers through foreign accounts.
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FATCA was originally slated to go start January 1, 2013, but some of the requirements have been delayed for one or two years. Requirements for individual taxpayers, however, begin with filings for tax year 2011(see right-hand box.)
The delay in some regulations came in response to complaints poring out of banks and other financial institutions in Canada, Germany, Australia, the Netherlands and elsewhere that the requirements are so complex and costly that the companies could not change their internal systems in time.
The law affects all individuals, companies, and institutions that meet two criteria:
1. They have some form of cross-border economic activity; and
2. They have a business or citizenship relationship with the United States.
Americans expats in Canada are among those affected by the legislation. If they have offshore accounts or own foreign real estate, they will have to report it. Some expats people will have to report assets they did not previously have to disclose because the law contains a $50,000 reporting threshold (see right-hand box).
Local Banking May Become More Difficult
Moreover, the law may make it more difficult for American expats to bank locally. Observers note that some overseas banks already are choosing to deny services to American citizens rather than have to deal with the reporting requirements.
In addition, FATCA has raised some privacy concerns. Banks are subject to our country's relatively strict privacy regulations which may prevent disclosing personal information to a foreign government without the informed consent of the individual. Banks also are not required to know the nationality of their clients. To conform to FATCA the country may have to change its privacy laws.
IRS Commissioner Doug Shulman expressed some sympathy toward the plight of institutions and their complaints about the regulatory burden the law imposes when he announced the guidance and the delayed requirements. He said that while the guidance reflected a commitment to the law, it also reflected the agency's "serious commitment to listen to the implementation challenges of affected financial institutions and make appropriate adjustments to ensure a smooth and timely roll-out."
FATCA was enacted in 2010 as part of the Hiring Incentives to Restore Employment Act. The law requires foreign financial institutions to report to the IRS information about accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. In order to avoid being withheld upon under FATCA, a participating foreign institution will have to enter into an agreement with the IRS to:
1. Certain non-resident aliens and foreign entities have to submit the report, and
2. More investment vehicles must be reported. For Canadians, that includes retirement and other savings.
If you fall into the first category and own or control offshore accounts with a balance of more than $10,000 at any time during a calendar year, you have until June 30 of the following year to file the form with the U.S. Treasury Department. Required reporting includes:
- Any financial account maintained by a foreign financial institution;
- Any stock or security issued by a non-U.S. person;
- Any financial interest or contract held for investment that has a non-U.S. issuer or counterparty; and
- Any interest in a foreign entity. That means taxpayers who purchase foreign real estate through an entity are covered.
If you think you may be affected by this or any other U.S. tax law, consult with your accountant.
- Identify U.S. accounts;
- Report certain information to the IRS regarding U.S. accounts; and
- Withhold a 30 percent tax on certain payments to non-participating foreign financial institutions and account holders who are unwilling to provide the required information. The payments include U.S. source interest and dividends, gross proceeds from the disposition of U.S. securities, and pass-through payments.
Timeline for Requirements
IRS Notice 2011-53 outlines the following timeline or for foreign financial institutions and U.S. withholding agents to implement the various requirements of FATCA:
- A foreign financial institution must enter an agreement with the IRS by June 30, 2013, to ensure that it will be identified as a participating institution in sufficient time to allow withholding agents to refrain from withholding beginning on January 1, 2014.
- Withholding on U.S. source dividends and interest paid to non-participating foreign financial institutions will begin on January 1, 2014, and withholding on all withholdable payments (including on gross proceeds) will be fully phased in on January 1, 2015.
- Due diligence requirements for identifying new and pre-existing U.S. accounts (including certain high-risk accounts) will begin in 2013. Reporting requirements will begin in 2014.
- For purposes of IRS Notice 2011-53, high risk accounts include private banking accounts with a balance that is equal to or greater than $500,000.
This isn't the first time the IRS has expanded its reach into Canada and other countries in its beefed-up efforts to uncover illegal tax havens. Two years ago, the agency's Form TDF 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR) was revised, broadening filing requirements in two ways:
