Just when you think you know all you need to know about FBAR (Foreign Bank Account Reporting), a product of the Bank Secrecy Act of 1970, the impending FATCA (Foreign Account Tax Compliance Act) requirements loom.

The FATCA reporting provisions for individual taxpayers, while somewhat redundant to FBAR, carry their own set of penalties and are filed with the tax return rather than separately. 

FATCA, one of the provisions of last year’s HIRE (Hiring Incentives to Restore Employment) Act, is aimed at increasing tax receipts by identifying offshore U.S. accounts that could potentially be used for tax evasion purposes.

At first glance, there are similarities. The FBAR form, Treasury Form 90-22.1, essentially asks for the same information as the FATCA form, IRS Form 8938. However, TF 90-22.1 isn’t filed with the tax return, but is filed by June 30 of the year following the account activity it reports. Form 8938, Statement of Specified Foreign Financial Assets, should be filed with 2011 returns by the due date of the return.

The FBAR requires disclosure of foreign accounts aggregating over $10,000 at any time during the year, and has its own set of penalties running as high as 50 percent of the account value per year.

FATCA Form 8938, on the other hand, is required when the total value of specified foreign assets exceeds certain higher thresholds. For example, a married couple living in the U.S. and filing a joint tax return would not file Form 8938 unless their total specified foreign assets exceed $100,000 on the last day of the tax year, or more than $150,000 at any time during the tax year, according to the IRS. Form 8938 is not required from individuals who do not have an income tax return filing requirement.

While the information asked for is similar, Form 8938 does not replace or otherwise affect a taxpayer’s obligation to file an FBAR. It has its own penalties; failure to file could result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification. A 40 percent penalty on any understatement of tax attributable to non-disclosed assets can also be imposed.

FATCA also requires foreign financial institutions, or FFIs, to report information about accounts held by U.S. taxpayers directly to the IRS.

Under the terms of FATCA, FFIs will need to classify all account holders into three groups, according to Tony Wicks, director of AML (anti-money laundering) solutions at NICE Actimize, a global provider of financial crime, risk and compliance solutions. “They have to separate them into U.S. accounts, non-U.S. accounts, and recalcitrant accounts—those that are uncooperative or have failed to provide necessary documentation,” he said.

“Once an FFI has classified its accounts, there is a yearly reporting requirement to the IRS. There have been three rounds of guidance so far, and everyone is waiting for final regulations to be issued by December 31,” he said.

Since FATCA is U.S. law, FFIs can make the choice not to report on their customers, Wicks indicated. “In this case, they will be considered an NPFFI [non-participating FFI],” he said.

But before they opt for NPFFI status, they should consider the consequences, observed Wicks—a 30 percent tax withholding on all U.S. sourced income, as well as the negative impact to existing customers and the loss of high net worth customers.

“There is some posturing, with some institutions saying they will turn away U.S. accounts. But if an FFI chooses not to be compliant, it will affect all of their customers. A nonparticipating FFI will have its U.S. sourced income subject to 30 percent withholding. Non-U.S. taxpayers who aren’t otherwise subject to U.S. tax would withdraw their account and go to a bank that participates in FACTA so their investments would not be subject to U.S. withholding,” he said. “Most FFIs will decide to participate.”

The takeaway is that it looks like the government is serious about collecting tax on foreign accounts.

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