Foreign Account Tax Compliance Act
FATCA Tax Lawyers Update: FATCA Financial Institution Definition
/0 Comments/in FATCA Lawyers, Legal Notes /by ManagerOne of the key concepts in FATCA compliance is a “financial institution”. The definition of a financial institution (“FATCA Financial Institution”) is contained in the FATCA Model IGAs. In this article, I will explore some of the general concepts central to defining a FATCA Financial Institution.
Four Types of FATCA Financial Institutions
The concept of FATCA Financial Institution is defined in the Model IGA Agreements. Both Model 1 and Model 2 IGAs agree on the definition of FATCA Financial Institution: “The term ‘Financial Institution’ means a Custodial Institution, a Depository Institution, an Investment Entity, or a Specified Insurance Company.” Let’s go over each concept in more detail.
Definition of a FATCA Financial Institution: Custodial Institution
FATCA Model Agreements provide a fairly straightforward definition of a Custodial Institution: “The term ‘Custodial Institution’ means any entity that holds, as a substantial portion of its business, financial assets for the account of others.” In this context “substantial” means that, during the specified period of time, twenty percent or more of the entity’s gross income is derived from holding of financial assets and related financial services.
The specified period of time is defined in Model 1 IGA as “the shorter of: (i) the three-year period that ends on the December 31 (or the final day of a non-calendar year accounting period) prior to the year in which the determination is being made; or (ii) the period during which the entity has been in existence.”
Definition of a FATCA Financial Institution: Depository Institution
According to FATCA Model IGAs, “The term ‘Depository Institution’ means any Entity that accepts deposits in the ordinary course of a banking or similar business.”
This definition is fairly self-explanatory, but it should be noted that interest-paying client money accounts operated by insurance companies are included within the definition of a depository institution.
Definition of a FATCA Financial Institution: Specified Insurance Company
According to FATCA Model IGAs, “the term ‘Specified Insurance Company’ means any entity that is an insurance company (or the holding company of an insurance company) that issues, or is obligated to make payments with respect to, a Financial Account.” This definition basically applies to all insurance companies that issue or must make payments with respect to an Insurance Cash-Surrender Value Contract or Annuity contract (which is similar to an FBAR).
For the purposes of this essay, I am not going to engage in the discussion of a Financial Account definition (this is an issue that I addressed in another article); suffice it to say that the definition of a Financial Account under FATCA closely follows the FBAR definition of the same concept.
Definition of a FATCA Financial Institution: Investment Entity
Finally, FATCA Model IGAs provide a detailed definition of what constitutes an “Investment Entity”. This concept includes any entity that conducts as a business one or more of the following activities or operations for or on behalf of a customer:
“(1) trading in money market instruments (cheques, bills, certificates of deposit, derivatives, etc.); foreign exchange; exchange, interest rate and index instruments; transferable securities; or commodity futures trading;
(2) individual and collective portfolio management; or
(3) otherwise investing, administering, or managing funds or money on behalf of other persons. This subparagraph 1(j) shall be interpreted in a manner consistent with similar language set forth in the definition of “financial institution” in the Financial Action Task Force Recommendations.”
Notice that this definition encompasses any entity that is managed by an Investment Entity. Further note that the definition of an Investment Entity should be interpreted in a manner consistent with the definition of a “financial institution” in the Financial Action Task Force Recommendations.
Implications if FATCA Financial Institution Definition on Undisclosed Foreign Accounts
The broad definition of a FATCA Financial Institution has a profound impact on US taxpayers with undisclosed foreign accounts. The chief reason for this conclusion is the fact that as soon as an entity is classified as a FATCA Financial Institution, the entity must be FATCA compliant (unless it falls within a FATCA exemption) and should report all of its accounts owned (directly or indirectly) by US taxpayers.
Contact Sherayzen Law Office for Help With Undisclosed Foreign Accounts
The consequences of the IRS discovery of an undisclosed foreign account can be disastrous for the US owner of this account, including extremely high monetary willful civil penalties as well as criminal penalties.
This is why, if you have an undisclosed foreign account, please contact Mr. Eugene Sherayzen, an experienced international tax attorney of Sherayzen Law Office as soon as possible. Our team is well versed in FATCA compliance, FBARs and other foreign reporting issues. We have helped hundreds of US taxpayers around the globe and we can help you.
FATCA Compliance Presents Challenges for Hedge Funds
/0 Comments/in FATCA Lawyers, Legal Notes /by ManagerThe Foreign Account Tax Compliance Act (FATCA) created a worldwide international tax compliance regime that has influenced more industries than simply foreign financial institutions. FATCA compliance presents a formidable challenge even to hedge funds.
FATCA Compliance Challenges for Hedge Funds
The challenges that FATCA compliance poses to hedge funds is best understood by analyzing what FATCA compliance requires of hedge funds – a multi-group coordination effort from various divisions within a business enterprise: business, operations, technology, finance and compliance.
The compliance department, most likely with the cooperation of the in-house counsel (and outside counsel who specializes in FATCA compliance, if in-house counsel lacks such knowledge) should lay out the FATCA compliance goals and make sure that the FATCA compliance process complies with these goals. The operations division should create the framework for the FATCA compliance process, including how this process should be controlled and managed for tax reporting and tax withholding purposes. The technology division needs to build the IT infrastructure to address the technological challenges of FATCA goals in a cost-effective way. The members of the business division (which incorporates the actual customer intake) should be thoroughly educated in the FATCA compliance process as well as the company’s specific IT solutions.
When this FATCA compliance process is applied to the hedge fund industry, one can clearly see the numerous challenges that the hedge funds face in the implementation of their FATCA compliance. The hedge funds need to register their funds for FATCA on the IRS portal, gather various investor data with respect to numerous (and often changing) customers, review and assess such data, and properly report customer data to the IRS.
Another challenge for hedge funds is the required tax withholding. Unlike previous attempts at international tax legislation, FATCA has very effective enforcement mechanisms which forces all US banks, brokers and financial institutions to essentially work for the IRS, including withholding taxes. In fact, the hedge funds that deal in US dollars are likely to be subject to the withholding tax requirement at an increasing rate in the near future.
However, the tax withholding challenge for hedge funds goes far beyond the more straightforward fact that it will need to withhold tax. Rather, the biggest headache for hedge funds is the identification of the beneficial owners and controlling persons of their clients. A lot of investors in hedge funds operate through unregulated legal vehicles or individual agents; this fact makes the FATCA data collection process a much more difficult challenge for hedge funds.
Finally, the variations in IGAs to implement FATCA present an additional challenge. While this problem is not specific to hedge funds, it is the one that they still have to manage.
Impact of FATCA Compliance By Hedge Funds On US Taxpayers
Despite these challenges, many hedge funds are successfully addressing FATCA compliance issues and are incorporating advanced software solutions to make their look-through process more efficient.
These successes of hedge funds in their FATCA compliance make it difficult for US persons investing in mutual funds through foreign entities to conceal their ownership of these entities. This means that one can expect an increase of the IRS discovery of such investors.
If these investors are not in full compliance with their US tax obligations – particularly with respect to FBAR, Form 8938, foreign business ownership reporting, foreign trust ownership and foreign income disclosure – they may be facing catastrophic US tax consequences, including draconian FBAR willful penalties as well as potential imprisonment.
Contact Sherayzen Law Office for Help With Undisclosed Foreign Assets and Income
If you have undisclosed foreign assets or foreign income, please contact Sherayzen Law Office as soon as possible. After reviewing the facts of your case and analyzing the available voluntary disclosure options, Mr. Sherayzen will conduct your voluntary disclosure process from the beginning through the end, including the preparation all of the required legal documents and tax forms.
Main Differences between Model FATCA IGAs
/0 Comments/in FATCA Tax Attorney, Legal Notes /by ManagerAs FATCA is being adopted by more and more countries, it is important to understand that there are two types of model FATCA IGAs (i.e. intergovernmental agreements to implement FATCA) that are signed between various countries and the United States. Both model FATCA IGAs were issued by the US Treasury Department and both model FATCA IGAs are perfectly valid, but some countries prefer one model FATCA IGA over the other. In this article, I would like briefly discuss the main differences between the two model FATCA IGAs.
Model FATCA IGAs Background
FATCA (Foreign Account Tax Compliance Act) was enacted by US Congress in 2010 to target tax non-compliance of U.S. taxpayers with foreign accounts. Since that time, this law has established the global standard for promoting tax transparency and has been adopted by a very large number of countries around the globe.
The adoption of FATCA usually occurs as a two-step process. First, a foreign jurisdiction signs one of the two model FATCA IGAs with the IRS. Second, the foreign jurisdiction’s legislature modifies domestic law to implement the provisions of whatever one of the two model FATCA IGAs that the country signed.
Model FATCA IGAs: Model 1
The first of the two Model FATCA IGAs is called “Model 1IGA”. Its principal feature is that it requires foreign financial institutions (FFIs) to report all information required under FATCA to their domestic government tax agencies. The domestic tax agencies would collect all of the FATCA information and turn it over of the IRS.
Since the FFIs would do all of their reporting domestically to their own agencies, Model 1 IGA is sometimes negotiated as a reciprocal agreement. This means that some Model 1 IGAs require the IRS to provide certain information with respect to the tax residents of the country that signed such a reciprocal Model 1 IGA.
Finally, the FFIs covered by a Model 1 IGA do not need to sign an FFI agreement. However, the FFIs will still need to register on the IRS’s FATCA Registration Portal or file IRS Form 8957.
Model FATCA IGAs: Model 2
The second of the two Model FATCA IGAs is called “Model 2 IGA”. Unlike the other model IGA, Model 2 IGA requires FFIs to report the FATCA-related information directly to the IRS and without any intermediaries.
Since the FFIs report all FATCA-related information directly to he IRS, they need to register with the IRS and sign an FFI agreement (which should reflect the specific changes to the model FATCA IGAs negotiated by the foreign jurisdiction).
Both Model FATCA IGAs Lead to Disclosure of Foreign Accounts Held by US Persons
Irrespective of the type of the agreement, it is important to remember that both model FATCA IGAs are designed to perform the same function – disclosure of foreign accounts held by US persons (directly or indirectly). This means that the spread of both types of model FATCA IGAs presents a direct threat to any undisclosed foreign accounts of US persons with potentially catastrophic consequences for these US persons, including potential criminal prosecution and willful FBAR penalties in excess of the balances of these secret accounts.
Contact Sherayzen Law Office for Help with Undisclosed Foreign Accounts
If you have undisclosed foreign accounts, please contact Sherayzen Law Office as soon as possible. Our international tax lawyers will first carefully review the facts of your case and identify the best voluntary disclosure options available to you. Our international tax professionals will conduct your voluntary disclosure process from the beginning through the end, including the preparation all of the required legal documents and tax forms.
The Long Reach of the FATCA Letter Notice
/0 Comments/in FATCA Tax Attorney, Legal Notes /by ManagerThe FATCA Letter Notice is a critical component of a FATCA Letter that is causing significant problems for millions of US owners of foreign financial accounts. Yet, a lot of the FATCA letter recipients are completely unaware of the full impact of the FATCA Letter Notice. In this article, I will provide a general explanation of the FATCA Letter Notice and its importance to US owners of foreign bank and financial accounts.
What is a FATCA Letter?
When FATCA was implemented in July of 2014, foreign banks and financial institutions (“FFIs”) started to mail letters to their clients aimed to verify information required for the FFI reporting under FATCA. These letters are called “FATCA Letters”.
The FATCA Letters serve two important functions for the FFIs. First, the questions contained in or referred to by a FATCA Letter are designed to help FFIs verify whether the account holder is a US person. Second, the FATCA Letter is designed to give notice to the US account holders that their accounts will be disclosed to the IRS.
In this article, I will concentrate only on the FATCA Letter Notice and its most significant impact on US taxpayers.
The FATCA Letter Notice
Very few people understand that the there is not just one FATCA Letter Notice, but two different FATCA Letter Notices that serve different functions – the express FATCA Letter Notice and the implicit FATCA Letter Notice. The express FATCA Letter Notice is the official notice with respect to the FFI’s own FATCA compliance. The implicit FATCA Letter Notice is the notice forced upon the US account holders with respect to their US tax compliance.
The Express FATCA Letter Notice
The express FATCA Letter Notice is very simple – the FFI puts the US account holder on notice that his or her account will disclosed to the IRS. This means that the FFI has complied with its due diligence requirements for the US tax purposes as well as the local bank privacy purposes.
The express FATCA Letter Notice is the one that most US taxpayers understand and the one that they are most concerned about. This is understandable because the express FATCA Letter Notice tells US account holders that their accounts will be disclosed to the IRS irrespective of whether the account holders want this disclosure and whether the timing of this disclosure is convenient to them.
The Implicit FATCA Letter Notice
The implicit FATCA Letter Notice consists of the forcing upon the US account holder the knowledge of their past non-compliance with US tax laws. This “forcing” element is accomplished by the FATCA Letter’s statements that all foreign accounts owned by US persons must be disclosed to the IRS by these very persons. As soon as he receives a FATCA Letter, the US person is on notice that his foreign accounts are subject to complex US tax compliance rules and, if it turns out that these accounts were never properly disclosed, he is non-compliant with respect to past filings. In essence, this is a “shock therapy” method of inducing US tax compliance.
This implicit FATCA Letter Notice of past US tax non-compliance is very dangerous for three interrelated reasons. First, it forces the US recipient of a FATCA Letter to conduct current year’s tax compliance to avoid willful non-compliance designation. The current year’s compliance is done irrespective of the recipient’s circumstances and his ability to do so. At the same time, it provides the IRS with the information that this US person owns foreign financial accounts that were never reported previously.
Second, the receipt of the FATCA letter means that the US account holder should promptly take the necessary steps to conduct some form of an offshore voluntary disclosure. Failure to take these steps or a significant delay in conducting a voluntary disclosure may result in the IRS investigation and the account holder’s inability to conduct a voluntary disclosure. Moreover, the delayed reaction to the FATCA Letter Notice may strengthen the IRS case for arguing willful non-compliance with respect to any delinquent FBARs and any other information returns.
Finally, since the US taxpayer is forced to react swiftly to the implicit FATCA Letter Notice (due to the other two factors described above), his ability to choose the right path of his voluntary disclosure may be constrained by the lack of the necessary documentation or knowledge of other important facts. With the changes that the IRS implemented with respect to the 2014 OVDP (now closed), SDOP and SFOP, it is important to remember that engaging in one form of a voluntary disclosure may result in the subsequent inability to switch to another voluntary disclosure path.
Contact Sherayzen Law Office for Help With Your FATCA Letter
As you can see, receiving a FATCA Letter Notice is an event of potentially important implications. An inadequate response to a FATCA Letter Notice may have a highly deleterious effect on the US account holder’s ability to conduct voluntary disclosure (which means facing the draconian FBAR civil and criminal penalties) or choose the right type of a voluntary disclosure.
This is why, if you received a FATCA Letter, contact Sherayzen Law Office for help immediately. Our experienced international tax law firm has helped hundreds of US taxpayers like you to bring their US tax affairs into full compliance with US tax laws, and we can help you as well.
So, Contact Us Now to Schedule Your Initial Consultation! Remember, contacting Sherayzen Law Office is Confidential.