July 1 marked a milestone in the implementation of the US Foreign Account Tax Compliance Act (FATCA) for American expats and financial firms serving them around the world.
Although FATCA was passed by Congress way back in 2010, legal and political challenges have held up bringing the measure into full operation.
The Internal Revenue Service (IRS) has also delayed some of the legislation because US government online software and the ability of foreign financial firms to set up systems to identify US expats were lacking.
However, FATCA has finally jumped the last hurdle with the IRS setting July 1 as the date controversial penalties against financial firms failing to deliver their reports about US expats will start to bite.
Foreign financial institutions (FFIs) such as banks, investment houses and insurance firms must tell the IRS about the financial affairs of all their accounts controlled by US citizens every financial year.
Fines and tax penalties
Those that do not deliver the reports online face fines, a withholding tax of up to 30% of the value of their US dollar transactions and even a ban from trading on the American money markets.
These penalties would devastate a financial firm as they would effectively be barred from trading in US dollars, the main global default currency.
American citizens bear the brunt of FATCA, but the financial affairs of non-American spouses or business partners may also come under the law if accounts are held jointly with someone from the US.
Account controllers can also include US companies, trusts and partnerships as well as other entities.
Tax payers do not have to make any additional report to the IRS – only financial institutions.
How FATCA works
If their client is tax resident in the USA, the FFI has to report personal details, such as name, address, date of birth and social security information plus provide a financial statement for any account with a balance of $50,000 at the year-end or if less, any account that has had a balance of $75,000 during the year.
The rules are the same for US expats, but the balance figure is $200,000 instead of $50,000 and the rules have some flexibility for in-country accounts in the place where the expat is resident to try to minimise administration.
The information collected by the IRS is then cross-checked against tax filings by the account holder, who has to declare the same offshore accounts and investments on forms attached to their returns.
Any anomalies could signal a tax investigation by the IRS.
Millions of Americans affected by FATCA
Around 5 million US expats and millions more US tax residents are affected by FATCA. The issue with many is that although they live overseas, they still have to file tax documents with the IRS detailing their worldwide income each year.
The US is the only country besides the economic minnow of Eritrea on the Horn of Africa that makes this demand of citizens.
Just over 200,000 FFIs are registered with the IRS, along with more than 100 international tax authorities representing all the world’s major economies.