Enacted in 2012, the Foreign Account Tax Compliance Act (FATCA) is a key component of the Hiring Incentives to Restore Employment (HIRE) Act. FATCA requires offshore citizens to report their assets via an 8938, Statement of Specified Foreign Financial Assets form. Click here, to see if this applies to your foreign assets. In addition, any foreign financial institution that either has substantial US ownership or has accounts held by US taxpayers is required to report certain information directly to the IRS. In other words, any foreign financial entity with an American cosigner is now subject to monitoring by the US government. To clarify, it’s not the firms themselves that will be monitored, but rather the banks that hold their accounts. If account holders refuse to identify themselves, foreign lenders must impose a 30% tax on payments or transfers. Some say this is akin to asking foreign institutions to do the IRS’ dirty work, but the IRS and US Department of the Treasury maintain these actions are necessary in order to combat tax evasion by US citizens living abroad and/or holding investments in offshore accounts.
Critics of FATCA claim that it complicates expatriate’s life overseas. Not only are they required to complete additional documentation and are potentially subject to higher tax rates, but it may make American workers less attractive to firms who do not want to deal with the notoriously complicated US tax system.
As a result, some expats are trading in their passports for citizenship abroad, feeling that the new legislation is more of a financial headache and burden then US citizenship is worth. The HuffPost quotes Marylouise Serrato, executive director of American Citizens Abroad – an advocacy group for American living abroad, as saying, “For the most part, it is in reaction to the complexity of the legislation and the tax situation that affects Americans.”
Related: Ten Facts About Tax Expatriation
Proponents of FATCA say these claims are overblown and that no one has provided any data to suggest a substantial increase in expatriation. In their view, the benefits of FATCA, such as reducing non-compliance by foreign account holders, outweigh the regulatory burdens.
The Treasury Department has successfully concluded negotiations with the United Kingdom, and expects to finalize bilateral agreements with over 50 additional jurisdictions at or near year-end including Switzerland, France, Germany, Italy, Spain, Denmark, Canada, Japan, Mexico, the Netherlands and Israel. Additional outreach will continue indefinitely for jurisdictions interested in pursuing an intergovernmental approach to FATCA compliance. FACTA will go into full effect one year later than intended on Jan 1, 2014, due to concerns from foreign institutions confronting compliance costs.
JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.