The Foreign Account Tax Compliance Act (FATCA) mandates that required U.S. taxpayers, including those living outside of the United States report their financial accounts held outside of the United States. It also requires foreign financial institutions report information to the IRS about their U.S. clients. The U.S. is also in pursuit of Intergovernmental Agreements with other countries to make sure that the requirements of FATCA are carried out by foreign financial institutions. FATCA was passed on March 18, 2010 as an amendment to an appropriations bill known as the HIRE Act.
FATCA has three main provisions:
- It requires foreign financial institutions, such as banks, to enter into an agreement with the IRS to identify their U.S. personal account holders and to disclose the account holders' names, TINs, addresses, and the transactions of most types of accounts. Some types of accounts, notably retirement savings and other tax-favored products, may be excluded from reporting on a country by country basis. U.S. payors making payments to non-compliant foreign financial institutions are required to withhold 30% of the gross payments. Foreign financial institutions which are themselves the beneficial owners of such payments are not permitted a credit or refund on withheld taxes absent a treaty override.
- U.S. persons owning these foreign accounts or other specified financial assets must report them on a new Form 8938 which is filed with the person's U.S. tax returns if the accounts are generally worth more than $50,000; a higher reporting threshold applies to US persons who are overseas residents and others. Account holders are subject to a 40% penalty on understatements of income in an undisclosed foreign financial asset. Understatements of greater than 25% of gross income are subject to an extended statute of limitations period of 6 years.It also requires taxpayers to report financial assets that are not held in a custodial account, i.e. physical stock or bond certificates.
- It closes a tax loophole that foreign investors had used to avoid paying taxes on U.S. dividends by converting them into "dividend equivalents" through the use of swap contracts.
Armed with new weapons to make foreign governments and financial institutions comply, the Departments of Treasury and Justice wasted no time in testing out their new powers. The first target was the most obvious – Switzerland. UBS was the target of an aggressive enforcement action. In the end, UBS was forced to turn over the names and information of 4,000 U.S. taxpayers. In order to settle a corporate criminal action for failure to comply, UBS paid a $780 million dollar fine. Switzerland’s oldest bank, Wegelin & Co. faired far worse. It paid only $74 million in fines, restitution and forfeitures, but it was dealt the death penalty when its board agreed to cease to do business to avoid criminal liability. In August of 2013, to avoid further prosecutions the United States and Switzerland signed an agreement that provides for fines in exchange for non-prosecution agreements for banks that have facilitated American tax evasion. Given the success in shutting down the Switzerland offshore banking industry for U.S. taxpayers, it is believed that Treasury and Justice will be launching its next assault on Israel and the Caribbean.