If you are an American expatriate, you only have a few months to get your finances in order before the Internal Revenue Service (IRS) will legally require you to report the sums of your foreign bank accounts to Uncle Sam. Foreign Account Tax Compliance Act (FATCA), which requires foreign financial institutions to report to the IRS information about financial accounts held by U.S. taxpayers or face a new U.S. withholding tax, goes into effect July 1.
It was only in 2010 that President Barack Obama signed the bill ‘Hiring Incentives to Restore Employment Act’. Hidden discreetly in the bill’s pages was FATCA. The law mandates that United States “persons” (this includes individuals who live outside of the United States) to report their foreign financial accounts. Furthermore, according to FATCA regulations foreign banks have to report to the IRS the details of American-client bank accounts. FATCA came about because Swiss banks were helping some U.S. citizens hide their money from the IRS to evade taxes. In 2009, the Swiss bank UBS was in the spotlight and in the end paid the IRS a $780 million fine, and gave them the names of 4,450 account holders.
In fact, all global organizations will be asked to report a U.S. citizen’s bank account balance if it exceeds $200,000 for all non-resident expats. This may not seem like a big deal to most, but to those U.S. citizens who are non-residents, it is. In fact, almost all countries do not tax the income of citizens that is earned outside of their country, and the U.S. is one of only two countries that taxes individuals based on citizenship rather than residence.
While the law may be well intended and was created to catch those who practice tax evasion, it is borders infringement on privacy laws. Furthermore, some expats complain of financial institutions refusing business from Americans due to potential conflict with the IRS. Additionally, those Americans who have accounts are being asked to comply with “administrative requirements” that are too cumbersome and because of this some expats feel as though they have to close their accounts.
It is not just financial advisors and institutions that are frustrated by complicated tax code and FATCA regulations even some countries are showing resistance to the U.S. On March 26, Julius Melnitzer of the Financial Post wrote, “Leaked documents suggest that the federal government and the Canada Revenue Agency have deliberately undermined an intergovernmental agreement with the U.S. aimed at catching American tax evaders living in Canada.”
According to Diane Freda with Bloomberg’s Daily Tax Report, “Practitioners are concerned that their systems may not be ready to handle the new reporting and they will be required to do mandatory withholding that might lead to over-withholding. Last month, the Treasury Department and the IRS issued the last substantial package of regulations improving the rules issued in January 2013.”
Freda went on to write that the Internal Revenue Commissioner, John Koskinen said, “the IRS made 50 amendments and clarifications that took into account feedback from outside stakeholders. The IRS has also struck intergovernmental agreements with 24 foreign governments that will allow them to comply with the FATCA reporting provisions.”
Regardless of how you feel about the law, if you have an offshore account your easiest route is compliance with the rules and regulations of Uncle Sam.
If you have further questions about U.S. tax code, or would like to consult with a tax resolution lawyer, contact the experts at U.S. Tax Shield today.