Category: FATCA

Is there a monster living under your bed?

As published in The XPat Journal, Spring 2015. www.xpat.nl/xpat-journal

Is there a monster living under your bed?

What all U.S. expats need to know

By Charles Rubenacker

If you are an expatriated American, you might want to keep your lights on. Those dust bunnies could be more than meets the eye.

First and foremost, if you are an American expatriate living in the Netherlands – or many other countries – you absolutely need to report your income to the United States government, via a ‘tax return’ (Form 1040), regardless of how long you have lived abroad. Along with that obligation comes another surprise to many expats. If you reside outside the U.S. and have foreign accounts or investments that total more than $200,000 at the end of the tax year, or more than $300,000 at any time during the tax year, you are required to file a Form 8938 along with your Form 1040. (Filing status will affect these totals.) Let’s take a closer look at this latter obligation, referred to as ‘FATCA’.

The Foreign Account Tax Compliance Act (FATCA) has been dominating the financial news, both at home and abroad. Why?

FATCA was quietly signed into law in March 2010. The published reason for FATCA’s coming into existence was to target non-compliant U.S. taxpayers with foreign accounts, focusing on U.S. taxpayers that may not have been reporting certain foreign financial accounts and offshore assets. FATCA reaches beyond the individual, however, and has been steadily bringing foreign financial institutions into the scheme, requiring those institutions to report any U.S. taxpayers with a foreign account, and also to report any foreign entity that is substantially owned by a U.S. taxpayer. Although deemed a voluntary program, foreign financial institutions not participating face economic sanctions by the U.S. government for failure to comply. To date, 51 nations have signed disclosure agreements under the Intergovernmental Agreement (IGA) and obtained their Global Intermediary Identification Number (GIIN) from the U.S. Treasury Department. Those 51 nations include the Netherlands.

Under FATCA, to avoid being withheld upon, foreign financial institutions (FFIs) may register with the IRS and agree to report to the IRS certain information about their U.S. accounts, including accounts of certain foreign entities with substantial U.S. owners. (In the Netherlands alone, more than 3,100 institutions have already registered.) FFIs that enter into an agreement with the IRS to report on their account holders may be required to withhold 30% on certain payments to foreign payees, e.g. expats, if such payees do not comply with FATCA. Unless exempt, FFIs that do not both register and agree to report U.S. taxpayer accounts face a 30% withholding tax on certain U.S.-source payments made to those foreign financial institutions.

Also keep in mind that these FATCA requirements are in addition to the long-standing requirement to report your foreign financial accounts on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) (formerly TD F 90-22.1).

There are serious penalties for not reporting these financial assets if you must file FATCA Form 8938 and do not do so; you may be subject to harsh penalties: a $10,000 failure-to-file penalty, plus an additional penalty of up to $50,000 for continued failure to file after IRS notification, and a 40-percent penalty on an understatement of tax attributable to non-disclosed assets.

According to the U.S. Treasury Department, “Those required to file an FBAR who fail to properly file a complete and correct FBAR may be subject to a civil penalty not to exceed $10,000 per violation for non-willful violations that are not due to reasonable cause. For willful violations, the penalty may be the greater of $100,000 or 50 percent of the balance in the account at the time of the violation, for each violation.”

Remember, as the final FATCA agreements are signed and FFIs continue to register with the IRS, your foreign financial account information will no longer be a private matter; it will be surrendered to the U.S. Treasury Department.

So keep your lights on. Not complying will awaken the monster under your bed.

 

Recommended Bedtime Reading:

Foreign Account Tax Compliance Act (FATCA) – Resource Center — http://www.treasury.gov/resource-center/tax policy/treaties/Pages/FATCA.aspx

Summary of FATCA Reporting for U.S. Taxpayers — http://www.irs.gov/Businesses/Corporations/Summary-of-FATCA-Reporting-for-U.S.-Taxpayers

Report of Foreign Bank and Financial Accounts (FBAR) — http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Report-of-Foreign-Bank-and-Financial-Accounts-FBAR

Corporate Filing Deadline

March 16, 2015

Deadline for corporate tax returns (Forms 1120, 1120A, and 1120S) for the year 2014, or to request automatic 6-month extension of time to file (Form 7004) for corporations who use the calendar year as their tax year. (The normal deadline for corporate returns is March 15th, but this falls on a Sunday, so the deadline is pushed to the next business day, which is Monday, March 16th.)

Thinking of renouncing your U.S. citizenship?

Thinking of renouncing your U.S. citizenship?

Expatriated U.S. citizens and Green Card holders may want to think twice before renouncing their U.S. citizenship in order to end U.S. tax reporting obligations. (And yes, expatriates and Green Card holders are required to report their annual income and foreign investments to the U.S. government – annually.)

It may sound like a sound strategy, particularly if you are a long-term expat, but, take heed. As the Foreign Account Tax Compliance Act (FATCA) globally takes root into the foreign banking institutions, expatriated U.S. citizens and Green Card holders will begin receiving mandatory self-certification forms to establish their U.S. tax status. In the Netherlands, for example, where I currently reside, ING bank has started collecting just such data. ING is obligated to report your status to the Dutch Tax Authority — then the Dutch Tax Authority in turn reports this information to the IRS.

As a result, any scheme to obtain a ‘Loss of Citizenship and Nationality’ is perhaps a bit over-simplified and misunderstood in terms of tax and foreign investment reporting. If a tax is recognized under the U.S. tax law, the only way to discharge the liability with the U.S. federal government is to pay the tax owed. The IRS generally can collect – indefinitely – an income tax owing against a taxpayer who lives outside the U.S., as the 10-year statute of limitations for collection does not apply when the individual resides outside the United States for a continuous period of at least six months.

Expatriation is a complex matter and involves both the Department of State and the Internal Revenue Service. As further explained on the Travel.State.Gov website, one can plainly see that this isn’t a matter of walking into the Consulate in your host country and surrendering your U.S. passport. Legal advice may be wise. At Tax-Expatriation you will find an additional in-depth article further explaining U.S. Citizen Renunciation.

Yes, the new regulations under FATCA are complicating matters for expatriates and Green Card holders worldwide, but it’s advisable to know your position before you set renunciation into motion. It’s also advisable to update your reporting obligations while you can still volunteer to do so.