FATCA was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. The legislation added two significant reporting obligations related to foreign financial accounts and assets that are held directly (or in certain cases indirectly) by U.S. taxpayers.
New for 2011 - Foreign Financial Account Reporting
Starting with taxable years beginning on or after January 1, 2011, U.S. taxpayers holding financial assets outside the United States with an aggregate value exceeding $50,000 for such years must report those assets to the IRS on a new Form 8938 (only a draft of which, without instructions, has been released by the IRS to date) that must be attached to their annual tax return. The definition of “foreign financial asset” is broader than, and overlaps, the definition of “foreign financial accounts” for FBAR purposes. The definition includes not only the typical depositary and custodial accounts held at foreign financial institutions, but also foreign stock or securities, foreign financial instruments (e.g., a debt instrument issued by a foreign person) and any interest in a foreign entity. The penalty for failing to file such form is $10,000 (and a penalty of up to $50,000 may be imposed for continued failure after IRS notification). In addition, underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40%. At this point, no guidance beyond the statutory provision has been issued. It is expected that the IRS will issue the much needed guidance on the filing of Form 8938 before the 2011 returns are due.
New for 2013 – Foreign Financial Institution Reporting
Beginning in 2013, FATCA will require foreign financial institutions (“FFIs”) and certain other foreign entities to report directly to the IRS certain information about financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold a substantial ownership interest. If the FFIs and foreign entities do not supply the required information about their U.S. owners, the payors of U.S. source income to such foreign entities must withhold 30% from any such payment, including proceeds of sales of items producing interest or dividends from U.S. sources. The IRS has issued limited guidance on this new reporting obligation to date, but is expected to provide substantial guidance in the form of treasury regulations before 2013.