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Are You In FATCA Compliance?
The Foreign Account Tax Compliance Act was passed by Congress in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act to combat tax avoidance by US persons with investments in offshore accounts. The US Treasury Department and the IRS continue to develop guidance on FATCA. The law generally requires foreign financial institutions to report certain information about certain financial accounts maintained by U.S. taxpayers or foreign entities in which U.S. taxpayers have a significant ownership interest and must pay their taxes.
FATCA generally requires reporting of foreign financial assets, including some common assets such as financial accounts held at foreign financial institutions. Foreign shares or securities not held in a financial account. Foreign partnership interests and investment funds. Some less commonly reported cases, such as investment vehicles of foreign or domestic donor trusts to which you are a donor. Life insurance or annuity contracts issued abroad have a cash value. Foreign hedge funds and foreign private equity funds.
US law treats US persons and foreign persons differently for tax purposes. A United States citizen is a person born in the United States, Puerto Rico, Guam, and the United States Virgin Islands. A person who was born in American Samoa or the Commonwealth of the Northern Mariana Islands and has chosen to treat them as a US citizen. The Child Citizenship Act (Child Citizenship Act) applied to both adopted and biological children of U.S. citizens, who would automatically acquire U.S. citizenship after meeting certain conditions. A foreigner is any person who is not a U.S. citizen or non-U.S. citizen. You are considered a non-resident alien unless you meet one of the two tests. You are a U.S. resident alien for tax purposes if you meet the green card test or the substantial presence test for the calendar year (January 1 through December 31). You are a resident of the United States for federal tax purposes if you are a lawful permanent resident of the United States at any time during the calendar year. This is called the “green card” test. In order to meet with a US resident for tax purposes, you must be physically present in the United States (US) on at least the following dates:
1) 31 days in the current year and
2) 183 days in a 3-year period including the current year and the two years immediately preceding it.
Under FATCA, US taxpayers with financial assets outside the US must report those assets to the IRS. This is in addition to the tax reporting obligation known as FinCEN’s Form 114 Report of Foreign Bank and Financial Accounts, known as FBAR. FATCA requires foreign financial institutions to report directly to the IRS information about financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers have a significant ownership interest. Reporting institutions are not only banks, but also other financial institutions such as investment companies, brokers and certain insurance companies. Certain non-financial foreign entities are also required to report their US owners. We can see that this is the reason why, when trying to open a new account at a foreign financial institution, they ask about citizenship.
FATCA requires U.S. taxpayers with foreign financial assets whose aggregate value exceeds the reporting threshold (at least $50,000) to report information about those assets on Form 8938 with their tax return. The reporting thresholds vary depending on whether you file a joint income tax return or live abroad. If you are single or filing separately, you must file Form 8938 if you have more than $200,000 in foreign financial assets at the end of the year and live abroad, or more than $50,000 if you live in the United States. A U.S. citizen whose tax residence is in a foreign country and who has resided in one or more foreign countries for at least 330 days in any consecutive 12-month period is a resident abroad. If you’re married filing a joint return and living abroad, you must file Form 8938 if the total value of your foreign financial assets is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year. These thresholds also apply if only one spouse is abroad. If you are unmarried, the total value of your financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year.
Form 8938 must be filed if the individually reported value of foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. If filing as a joint spouse, the total value of foreign financial assets exceeds $100,000 on the last day of the tax year or $150,000 at any time during the tax year. If you file as married filing separately, your foreign financial assets total more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. When calculating the value of foreign financial assets, the threshold must be taken into account at half the value of foreign financial assets jointly owned by the spouse. But for reporting purposes, the full value must be reported on form 8938.
Foreign financial instruments:
Foreign financial assets include foreign financial accounts and foreign non-account assets held for investment purposes (as opposed to assets held for trading or business purposes), such as foreign stocks and securities, foreign financial instruments, contracts with non-US persons, and interests in foreign entities. These must be reported.
Foreign currency is not a defined foreign financial instrument. Foreign real estate is not a specified foreign financial asset if it is used as a personal residence or rental property. If the property is held through a foreign entity, the interest in the entity must be reported if the total value of all defined foreign financial assets exceeds the applicable reporting threshold. Directly owned tangible assets such as works of art, antiques, jewelry, cars, and other collectibles are not considered foreign financial assets. Directly held precious metals, such as gold, are not designated foreign financial instruments. However, gold certificates issued by a foreign person may be foreign financial instruments and must be reported based on the reporting threshold.
You do not need to report assets if the financial account is maintained by a US payer. U.S. payors include a U.S. branch of a foreign financial institution, a foreign branch of a U.S. financial institution, and foreign subsidiaries of certain U.S. corporations. Therefore, financial accounts with such entities do not need to be reported. Assets do not need to be declared if the beneficiary in the foreign trust or foreign estate does not know or has reason to know about the interest. If you receive a distribution from a foreign trust or a foreign estate, you know that you have an interest in the trust or estate. You do not need to report if you have an interest in a foreign government’s Social Security, Social Security, or other similar programs, as these are not designated foreign financial instruments. If certain foreign financial assets have been reported on other forms, you do not need to report them a second time on Form 8938.
They are generally a reasonable estimate of the asset’s highest fair market value for the tax year, and the value of the specified foreign financial assets must be determined to see if the value exceeds the applicable threshold based on filing status, etc. Fair value is determined by a reasonable estimate of the market value of a specific foreign financial asset based on publicly available information from reliable financial sources or other verifiable sources. In the case of foreign assets, the value is recorded in foreign currency. Currency exchange rates from the Bureau of Fiscal Service of the United States Department of the Treasury must be used to convert the denomination to US dollars. The exchange rate is based on the exchange rate on the last day of the tax year.
Consequences of non-compliance:
Huge penalty for non-compliance. If someone is required to file Form 8938 but fails to file, the IRS imposes a penalty of $10,000 for failure to file, and an additional penalty of up to $50,000 if the person continues to fail to file after being notified by the IRS, and imposes a 40 percent penalty in case of undervaluation of the tax. undisclosed assets. If someone fails to file or misreports an asset on Form 8938, the statute of limitations is extended three years after the required information is provided. If one omits more than $5,000 of gross income attributable to specified foreign financial instruments, the statute of limitations is extended to six years after the return is filed. An exception to this is if the default can be traced back to a valid reason, then the statute of limitations is extended only for the item or items related to the default, and not for the entire tax return. If the failure to disclose was due to reasonable cause rather than willful negligence, we will not impose a penalty. Reasonable cause is determined on a case-by-case basis, based on facts and circumstances.
The IRS has announced a new simplified compliance process if you are a non-resident US taxpayer. Contact a tax professional to review your case for FACTA compliance.
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