IRS continues to target foreign accounts, update on FATCA

Certain provisions within the FATCA were extended in an effort to increase compliance with offshore account reporting.

The Internal Revenue Service (IRS) continues to target foreign accounts for potential tax law violations. A recent article in Forbes discussed how the Foreign Account Tax Compliance Act (FATCA) is "up and running." This act is designed to specifically target "tax non-compliance by U.S. taxpayers with foreign accounts," according to the IRS. The piece in Forbes notes that the federal agency is targeting these offshore account holders by gathering tax and foreign account information from other countries. Although it is not against the law to have offshore accounts, full disclosure is required.

More on the FATCA

The provisions within the FATCA are designed to ensure full disclosure of financial accounts and apply to individuals, financial institutions and governments.

Individual U.S. taxpayers are required to report information about foreign financial accounts and offshore assets within their income tax returns. Depending on the details of the accounts, Form 8938 and the FBAR may also be required. The IRS states that reporting is required if the asset value of the accounts is greater than the appropriate reporting threshold. For example, Form 8938 is generally not required if the value is at or below $50,000 at the end of the tax year. Participating foreign financial institutions are required to provide the account numbers, names, addresses, balances and U.S. identification numbers of individual United States citizens that are holding foreign accounts.

Both U.S. and foreign financial institutions fall within these provisions. U.S. financial institutions are required to withhold a certain amount on payments to foreign entities that fail to properly document FATCA status. Foreign institutions are to register with the IRS and report information on U.S. accounts.

The process can be simplified if governments enter into an Intergovernmental Agreement to implement the FATCA.

More on the extension

The IRS recently extended the deadline for certain transitional rules required by the Foreign Account Tax Compliance Act. These changes were outlined in Notice 2015-66. The Department of the Treasure and the IRS provided extensions for the following:

  • The date that "withholding on gross proceeds and foreign passthru payments begin"
  • Use of "limited branches and limited foreign financial institutions"
  • The "deadline for a sponsoring entity to register its sponsored entities and redocument such entities with withholding agents."

These changes are designed to help better ensure compliance with the FATCA.

Importance of legal counsel

Failure to comply with these provisions can lead civil and criminal charges. This can translate to steep financial penalties, potentially exceeding the balance within the foreign account, as well as potential imprisonment. As a result, individuals and businesses that make large investments oversees are wise to seek the counsel of an experienced international tax attorney.