Foreign Account Tax Compliance Act

Are you a U.S. citizen with a bank account in a foreign country? Are you a foreign expatriate with a U.S. bank account? If so, then you may be interested in learning about new regulations proposed by the IRS designed to uncover information about your foreign account, income and interest earnings. In addition, new regulations will provide the IRS with the opportunity to report the banking activities of expatriates in the U.S. to foreign tax agencies.

Key Point: Banks may soon be required to identify unreported foreign income and/or interest earned by U.S. citizens, as well as report income and/or interest earned held in foreign expatriates’ accounts in the U.S. to their homelands.

Proposed Regulation

Under the current law, interest income earned by foreign expatriates is not subject to taxation by the IRS. The proposed regulation would require that all U.S. banks disclose foreign account holders’ interest income to the IRS, which would retain the right to share it with other governments if they desired. The IRS hopes to use this information to exchange for data on U.S. citizens’ holdings in offshore banks, and to identify foreign companies controlled by Americans.

If these regulations become law it may create an increased tax burden for both groups. There are also concerns about privacy, governments seizing assets, flight of capital, the safe transfer of such information and appropriateness of sharing, as well as assignment of liability should an account become compromised due to these activities. Accountants, Bankers, and Attorneys agree that this is unnecessary regulation and will cost the US it’s competitive edge in attracting foreign deposits which actually help economic development especially here in South Florida. The Foreign Account Tax Compliance Act, FACTA, a new law scheduled to be implemented in 2013, may make the proposed reporting requirements unnecessary.

What is FACTA?

The Foreign Account Tax Compliance Act was passed in 2010 as part of the Hire Act to halt tax evasion. FACTA will impose expansive new compliance reporting requirements on foreign financial institutions and foreign expatriates. It requires foreign banks to identify and disclose U.S. accountholder information or be subject to a 30% US withholding tax for any payment of US investment income or proceeds from the sale of equity or debt instruments.

Key Aspects of FACTA include:

  • Proper Reporting: Encourages U.S. citizens worldwide and foreign financial institutions to properly report income and interest. Withholds 30% on payments of investment income by foreign financial institutions, unless they proactively identify and report all U.S. citizen accountholders.
  • Expanded Scope: Defines U.S. account to include accounts owned though foreign shell entities. This will expand the number and type of accounts that foreign financial institutions need to report to the IRS.
  • Additional Paperwork: Requires U.S. taxpayers to report their offshore assets worth $50,000 or more. This is IN ADDITION to the existing FBAR regulations that require the filing of specific forms if the foreign bank account has more than $10,000 in funds.