The latest measures come as the 1 January 2013 start date for the implementation of America’s increasingly controversial Foreign Account Tax Compliance Act approaches.
New form joins FBAR
Since as long ago as the 1970s, Americans with offshore bank accounts have had to file something called an FBAR, or Foreign Financial Account Reporting form, annually with their taxes, whether they live in the US or abroad. In addition to these obligations, some individuals also have to inform the IRS about any investments they may have in so-called passive foreign investment companies (PFICs), foreign companies, foreign partnerships and foreign trusts.
But now, beginning in 2012, those with foreign financial assets of more than $50,000 will also have to begin filing a new document, known, for now at least, simply as “new Form Number 8938”, according to David Treitel, tax director at US Tax & Financial Services, a London-based company which specialises in looking after the tax matters of expatriate Americans.
The first of these to be filed by US taxpayers will report on assets they have held since 1 January 2011, and the potential penalties for failing to file this new form “are substantial”, Treitel said.
“Given that this new reporting simply makes life more burdensome for everyone, our overall message is to start keeping records today,” Treitel added, in an email alert to clients.
FATCA targets tax evaders
As reported, FATCA was signed into law last year by President Obama, somewhat incongruously included in a much larger, US jobs bill known as the HIRE Act.
Intended to crack down on the use of overseas accounts for tax evasion purposes by American citizens, FATCA will add significantly to the tax reporting burdens for American citizens, foreign owners of US investments and income-generating assets, and all non-American financial services institutions – such as banks, trusts and investment firms – that have American account holders.
News of the most recent additional reporting requirements for individuals with non-US bank accounts is the latest of a steady stream of announcements connected with the implementation of FATCA, which are being met with growing alarm by financial institutions around the world.
Typical of the mainstream media’s growing awareness of the act and its potential for ensnaring unsuspecting financial institutions was an article a few days ago in the Calgary Herald of Calgary, Canada, beneath the headline: “Note to Obama: Canada is not the Cayman Islands”.
“Non-compliance could expose Canadian financial institutions and their millions of Canadian account holders to a punitive withholding tax on all US source income and on the proceeds from the sale of US investments…[jeopardising] the personal financial welfare of Canadians and [placing] Canadian financial institutions at a significant competitive disadvantage relative to their US counterparts,” it went on.
Last month, Georges Bock, a Luxembourg-based KPMG partner and head of tax at KPMG, told reporters at a funds event in London that FATCA could cause investors to sell out of US stocks, bonds and other investments, affecting the price of US shares as well as those of other countries in ways that are not yet fully clear.
Treitel said that in fact, American tax law is actually “very simple to understand” once you understand two basic facts: “It is world-wide, and it is forever”, a reference that the only way an American may avoid annual tax reporting duties is to renounce his or her citizenship, a complicated and often costly business in itself.
What Form 8938 requires
According to Treitel, many questions remain to be answered about the new Form 8938, but in general it asks individuals to supply “the maximum value” of their assets during the taxable year in question.
In addition, he told clients in his emailed newsletter, the form should also provide the following information in the case of a:
• Financial account – the name and address of the financial institution in which the account is maintained and the account numbers
• Stock or security – the name and address of the issuer and identification of the class or issue of which such stock or security is part
• Other assets such as partnership interest, pension plan or foreign trust – the name and type of the entity, and its mailing address
Amnesty scheme softened
As for the amnesty scheme, which was unveiled by US authorities in January, individuals who come forward under the scheme will still have to pay the taxes and interest they owe on their previously undeclared income dating back to 2003. However, the penalty on top of this for many has been reduced to 5% from 25% of the maximum amount they held during post-2003 time period, Treitel said.
In order to qualify for the lower penalty, the individual would have to live in a foreign country; be in receipt of less than $10,000 a year in US source income; and the income that he or she failed to report is in a foreign country rather than in the US, Treitel said.
As reported, the new amnesty programme, which is being called the 2011 Offshore Voluntary Disclosure Initiative, or OVDI, requires taxpayers with undeclared assets in offshore accounts to come forward by 31 Aug. Those who do will no longer be at risk of being pursued by the IRS for their unpaid taxes and with the threat of criminal punishment.
