Meeting US FATCA Reporting Requirements

December 31, 2015 | Download PDF

The Foreign Account Tax Compliance Act (“FATCA”) was enacted with the primary goal of providing the Internal Revenue Service (“IRS”) with the ability to locate US tax evaders hiding assets abroad.  Foreign Financial Institutions (“FFIs”) will now need to conduct the necessary due diligence and meet the necessary documentation requirements in order to help find such US tax avoiders.  Non-compliance can result in the FFI paying a 30% withholding tax on income from US sources.

FATCA requires FFI’s to report such data either directly to the IRS by entering into an Intergovernmental Agreement (“IGA”) or through the FFI’s own local government.  FFIs must now conduct due diligence to scrutinize their own records and documentation in order to determine the “FATCA status” of their existing account holders.  So what are the overall steps a FFI needs to perform?  They are as follows:

  1. Determine who meets the IRS definition of who must be reported and whether the account holder is an entity or an individual as the rules are different for each;
  2. Collect the data electronically if possible.  Larger institutions should have most of this information in an electronic format.  Smaller firms may be more paper intensive which can present more of a challenge and may require contacting the client directly to get know-your-customer (“KYC”) information;
  3. Once the data has been collected, categorize the accounts by their aggregate value.  Reporting thresholds vary whether you file tax returns jointly or live abroad.  Individuals with accounts of at least $50,000 in aggregate value may be subject to reporting, as may entities $250,000 in aggregate value.
  4. Once the data has been categorized, the IRS has provided specific criteria to look for in determining whether as account holder should be reported to the IRS or local tax authority as follows:
    • Identification of an investor as a US resident or citizen
    • US place of birth
    • US mailing address (including a US post office box)
    • US telephone number
    • Instructions to transfer funds to an account maintained in the US
    • Power of attorney or signatory authority granted to a person with a US address
  5. Once account holders believed to be liable for US taxes are identified, the information must be verified.  For accounts of more than $1 million it may not be sufficient enough to look at documentation, but rather, doing that in conjunction with interviewing bank relationship managers as well as potentially contacting the client themselves may be necessary in order to know whether an individual is a US based person.  If an account holder refuses to provide the necessary documentation they are to be treated as a “recalcitrant accountholder” and the FFI must impose 30% FATCA withholding on US source income.

FFI’s that decide not to cooperate with FATCA potentially run the risk of paying heavy penalties.  Although the cost of compliance may be high, FFI’s should beware that the IRS is “zeroing” in on banks, investment managers, and broker-dealers who fail to send information on US persons to the IRS or their local taxing authorities.

This article was originally published in Morison KSi's Global Opportunities Bulletin, December 2015. It was reprinted by permission in Global Tax Weekly, December 31, 2015, published by CCH, a Wolters Kluwer business.


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