An Introduction to the Foreign Accounts Tax Compliance Act (FATCA)
The Internal Revenue Service (IRS) is continuing its crackdown on people who may be trying to use foreign financial institutions to avoid paying otherwise required federal taxes. The latest weapon in the IRS arsenal to collect necessary taxes on income gained by American companies and individuals - and the estimated lost $345 billion annual lost tax revenue that would should be collected upon that income - is the Foreign Accounts Tax Compliance Act (FATCA), part of the 2010 Hiring Incentives to Restore Employment (HIRE) Act.
The tax withholding provisions of FATCA will not go into effect until January 1, 2013, but companies, taxpayers and withholding agents are - thanks to guidance offered by the IRS in early 2011 - gearing up to begin the process of putting new compliance systems in place.
FATCA sets the onus for tax evasion law compliance not only upon the taxpayer him or herself, but also upon offshore banks classified as "foreign financial institutions" (FFIs) or "non-financial foreign entities" (NFFEs) that refuse to cooperate with IRS-sanctioned requests for information about American account holders, business owners and investors. It targets international business structures (i.e., companies incorporated in a foreign country to take advantage of taxation loopholes or less stringent tax regulations), offshore financial accounts, foreign financial holdings and other assets/real property held abroad.
What Will Foreign Financial Institutions Be Required to do Under FATCA?
Clearly the FATCA is an attempt not only to increase the amount of taxable dollars flowing into the American economy, but also to encourage companies and individual investors to keep their business on U.S. soil. To do this, it placed an increased burden on financial businesses abroad that handle American dollars. Once FATCA goes into effect in 2013, foreign financial institutions will be required to:
- Collect vital information about the owner/controlling party of accounts when the account contains funds from an American source
- Disclose that information to the IRS or other U.S. taxation authorities upon subpoena
- Withhold necessary taxes on those funds as required by U.S. law
If a FFI or NFFE fails to comply with FATCA's disclosure, reporting and withholding requirements, it runs the risk of:
- Being declared "off-limits" to U.S. business and banking institutions (i.e., not being allowed to conduct business with American companies or individual investors or not being able to refer/receive business from similarly situated American financial providers)
- Being subjected to a punitive 30 percent withholding tax
- Examination by U.S. tax authorities for an extended period of up to six years following an omission of income from a U.S. tax entity's foreign income sources
Why Is the FATCA Necessary?
From the perspective of American tax authorities and economic experts, many foreign accounts are viewed as safe havens for shady individuals and businesses seeking to avoid paying their fair share of taxes. That certainly explains industry experts estimates that somewhere between $100 and $345 billion dollars in tax revenue is lost each year because income and funds are craftily hidden in foreign accounts.
The federal government has taken less severe measures in the past few years in an attempt to encourage compliance with tax collection laws, including periods of voluntary account disclosures where penalties, prosecution and other punitive measures were significantly downgraded. One such program in 2009 resulted in the disclosure of roughly 15,000 previously unknown accounts held in more than 60 foreign countries. Another program - the 2011 Offshore Voluntary Disclosure Program - which was in effect until September of 2011, encouraged others to come forward while the threat of negative consequences from failing to disclose accounts in the past was somewhat mitigated. These voluntary disclosure programs have been particularly helpful for the innocent investor, one who is unaware that he/she does not comply with a nuance of one of the countless federal tax laws that govern foreign financial accounts. The FATCA will pick-up where these programs leave off.
While the FATCA is not yet in effect, there are myriad current tax regulations that control the tax consequences of FFI and NFFE accounts. If you are concerned about complying with tax withholding provisions concerning your personal or business accounts, contact an experienced taxation law professional in your area to learn more about your legal rights and obligations.