Reporting Foreign Financial Assets Under Titles 26 and 31: FATCA and FBAR

Summary

All citizens of the United States as well as U.S. resident aliens are required to report their world-wide income for U.S. federal income tax purposes. However, where foreign assets are involved, this is an area in which taxpayers, knowingly or unknowingly, may fail to comply with the law. There are numerous information reporting requirements involving foreign assets that may assist the Internal Revenue Service (IRS) in recognizing a failure to report foreign income; however, both taxpayers and tax preparers may not be fully compliant with filing these forms. Again, this may be more a matter of ignorance of the requirements than any intent to skirt the law.

Neither the reporting requirement imposed by the Foreign Account Tax Compliance Act (FATCA) nor the Foreign Bank Account Reporting (FBAR) imposed by the older Bank Secrecy Act directly involves reporting income for tax purposes. Instead, each involves reporting the existence of financial assets or accounts located outside of the United States. Although in some cases the same accounts or assets may be reported on each information-reporting form, both forms may be required. Failure to file either form if required may result in significant penalties, in some cases amounting to the entire balance of the unreported account or more.

Tax evasion through offshore accounts can be facilitated by foreign financial institutions (FFIs) or other financial intermediaries. Although they may not be complicit in the tax evasion, these entities can play a part in curbing offshore tax evasion by reporting information on assets owned or controlled by entities subject to U.S. income tax. FATCA imposes reporting requirements on FFIs regarding their U.S. account holders, as well as obligations on non-financial foreign entities (NFFEs) regarding their U.S. owners. If the requirements are not met, then any withholdable payment to the entity is subject to withholding of tax at a rate of 30%.

Since FATCA’s passage, there has been criticism of the FFI and NFFE provisions and how they relate to other countries, including whether FATCA’s requirements are inconsistent with existing U.S. treaty obligations and what happens when the requirements conflict with another country’s domestic (e.g., banking or privacy) laws. The Treasury Department and IRS have reached out to other countries and entered into bilateral intergovernmental agreements with 24 of them. In general, these provide that the other country’s FFIs will be deemed compliant with FATCA’s requirements if they comply with the agreement. FATCA’s requirements have also been criticized as overly burdensome and stakeholders have indicated they have insufficient time to prepare for them. The IRS has responded by extending various deadlines under FATCA—while the 2010 law enacting FATCA provides that, in general, its provisions “apply to payments made after December 31, 2012,” the IRS has on several occasions extended various deadlines, with many provisions scheduled to go into effect on July 1, 2014.

Finally, legislation has been introduced in the 113th Congress that would repeal much of FATCA (S. 887); modify FATCA with the intent of “strengthening” it (H.R. 1554, H.R. 3666, S. 1533, and S. 268); or require that its effects on U.S. citizens living abroad be studied (H.R. 597).