Seven Years In, FATCA Still a Work in Progress
In a recent blog, we reviewed a judicial decision that derailed efforts by opponents of the Foreign Account Tax Compliance Act (FATCA), including Republican Senator Rand Paul, to challenge the FATCA and FBAR rules and regulations. Because the plaintiffs in the case were found to have no standing to bring the lawsuit, the case was dismissed by the lower court, and the dismissal was affirmed by the Appeals Court.
While the decision confirms that FATCA is most likely here to stay, recent efforts by the U.S. Treasury Department show that it continues to have its eye on at least modifying certain aspects of the rules that are overburdening U.S. taxpayers and foreign financial institutions that bear the burden of FATCA implementation.
Quick FATCA Background
The main objective behind FATCA, which was enacted in 2010, is to combat offshore tax evasion by: (1) requiring U.S. citizens, including those living abroad, to report their holdings in foreign financial accounts and their foreign assets on an annual basis to the IRS, and (2) requiring foreign financial institutions (“FFIs”) (which include just about every foreign bank, investment house and even some foreign insurance companies) to report to the IRS the balances in the accounts held by customers who are U.S. citizens.
If U.S. tax return filers don’t comply with the FATCA rules, they can be subject to severe penalties, and if foreign banks and other institutions don’t comply, they and their account holders can be subject to an automatic 30% withholding tax on U.S.-source payments such as interest and dividends.
FATCA has impacted U.S. expats in many important ways. Most importantly, it has allowed the IRS to extend its global tax reach further than ever before. Local foreign banks are requiring U.S. citizens to sign a Form W-9 or similar documentation verifying their citizenship. Mass amounts of account information are currently being sent to the IRS. It is, therefore, becoming an increasingly bad idea for non-filing U.S. expats to hide their heads in the sand.
In addition, annual IRS information reporting requirements have increased significantly with the addition of Form 8938, the so-called FATCA form which must be filed to disclose specific information about one’s foreign financial assets.
Relaxing of the FATCA Requirements
Since the enactment of FATCA, the U.S. government has repeatedly relaxed rules and delayed due dates for foreign partner countries and financial institutions that have demonstrated they are trying their best to meet implementation deadlines.
In the most recent instance, the IRS published Notice 2017-46, which provides, among other things, that foreign financial institutions in “Model 1 IGA” jurisdictions (i.e., partner countries that executed the ideal intergovernmental agreement with the U.S.) will not be in significant non-compliance through the year 2019 by virtue of a failure to report U.S. tax identification numbers (TINs) for preexisting accounts. The institution still must report the account holder’s date of birth, make annual requests for the TIN from the account holder, and search its electronic records for missing U.S. TINs before reporting information.
Potential Review of the FATCA Regulations
The Treasury Department, in its recent report to President Trump recommending general changes to the IRS regulations, indicated that it is considering possible modifications to the FATCA regulations. The Report offers little information about specific modifications, but notes that Treasury and the IRS have begun a comprehensive review of all tax regulations, including the very long and detailed FATCA rules. With the goal of making the regulations less extensive and burdensome, the Treasury’s project may bring significant changes to the FATCA regulations.
While FATCA continues to be challenged, it remains the law of the land for now and for the foreseeable future. However, sensitivities to taxpayer needs continue to influence the shaping of the FATCA rules. We will continue to monitor governmental actions involving FATCA and provide updates to you in our blog and monthly newsletters.
By Ephraim Moss, Esq. & Joshua Ashman, CPA