FATCA on the rise: IRS to spread its global tax reach farther than ever in 2016
The Foreign Account Tax Compliance Act, commonly known as FATCA, has been called everything from “America’s manifest destiny law” to an “American tax nightmare.”
The ultimate goal of FATCA, enacted in 2010, is to enable the IRS to extend its information-gathering powers on a global scale. It combats offshore tax evasion in two distinct ways:
- by requiring U.S. citizens, including those living abroad, to report their holdings in foreign financial accounts and their foreign assets on an annual basis to the IRS, and
- by requiring foreign financial institutions (“FFIs”) (which include just about every foreign bank, investment house and even some foreign insurance companies) to report to the IRS (or to their government, which then reports to the IRS) the balances in the accounts held by customers who are U.S. citizens.
If U.S. citizens don’t comply with the reporting rules, they can be subject to severe penalties if caught by the IRS. If the FFIs don’t comply, they and their account holders may be subject to an onerous and automatic 30% withholding tax on payments such as interest and dividends from U.S. sources.
Over the past couple of years, citizens abroad have already started to feel the effects of FATCA. Local foreign banks have begun identifying their American clients and sending out letters informing them that if they indeed have American citizenship, then they need to complete an IRS Form W-9 or other information form, and sign a waiver of confidentiality, in order to maintain an account at the bank. These forms trigger a gathering of information that is meant to ultimately fall in the hands of the IRS. Knowing this, some U.S. account holders have balked and, in return, have had their investments liquidated and accounts closed.
FATCA has been praised by many for improving global tax transparency and has been vilified by many others because it demands rigorous compliance with arcane, complex, and overreaching rules that the IRS has until now never even attempted to enforce on a global basis.
Whatever side of the FATCA debate you’re on, there’s no doubt that 2016 is a pivotal year for the growth of FATCA’s global influence.
Several months ago, the IRS announced that it had received its first digital information about U.S. citizens’ overseas accounts from other governments and, in exchange, provided those governments with information on foreign persons’ accounts in the U.S. While information had been exchanged previously, this marked the beginning of grand-scale digital exchanges.
Several governments have already begun information swapping with the U.S. In September of 2015, for instance, the Australian government boasted that it had digitally provided details of over 30,000 financial accounts worth over $5 billion to the U.S. government.
The 2016 year marks the first full year that massive digital information exchanges will be occurring between the U.S. and its ambitious FATCA partners. This will lead to an explosion of information that the IRS will have at its disposal to hunt down delinquent taxpayers all over the world.
2016 also contains an important date on the FATCA timeline. September 30 of this year marks the current deadline for dozens of additional countries that have signed so-called Model 1 Intergovernmental Agreements (IGAs) with the U.S. to hand over information regarding accounts held by U.S. taxpayers. After the deadline, the dreaded 30% FACTA tax will kick in to wreak tax havoc on the firms in the non-disclosing countries. In this sense, 2016 represents the year that FATCA truly gets off the ground, and with each passing year, FATCA’s influence will only continue to grow.
After spending the majority of their respective careers at two of the largest accounting firms (PwC and Ernst & Young), Joshua Ashman and Ephraim Moss founded Expat Tax Professionals, a firm specializing in the needs of U.S. citizens living abroad.