FATCA Lawyer Boulder CO | Three Main Parts of FATCA

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Now FATCA, when it came out in 2010, was a revolutionary piece of legislation. It completely changed not only US Tax Compliance but the entire landscape of International Tax Compliance. After FATCA, we have OECD countries developing a Common Reporting Standard, the CRS to which the US did not join for very interesting reasons; that could be a topic of a CLE in of itself.

But, FATCA affects pretty much everyone who is doing business internationally. Why is that? Well, there are the three parts of FATCA that I would like to discuss today. There are some different provisions of FATCA which do not quite fall within those three parts; but they’re not important for today’s discussion, or at least not directly important.

The first part of FATCA is the requirement by Foreign Financial Institutions to report assets owned by US Persons to the IRS directly or indirectly; it depends on the FATCA enforcement treaty. So in essence, all the Foreign Financial Institutions are now forced to become agents of the IRS, reporting agents. In essence it’s that third party verification of US Tax Compliance that has been completely absent from US Tax Law; it just never existed before. For example FBARs, they don’t have any third party verification. That’s why as an information return, FBARs actually have very limited utility.

Now why would Foreign Financial Institutions comply with it? There’s a second part of FATCA: a 30% withholding tax on the gross amount of transactions. Can you imagine that a 30% withholding tax on the entire value of the transaction, not on the gain, loss it doesn’t matter just on the gross value? So this means that if say Institution A which is FATCA compliant and there’s an Institution B which is not FATCA compliant and then your client comes to Institution A and says, ‘Here, I’m sending $100,000 to Institution B, Institution A is going to withhold 30% tax from that $100,000 and send the rest of it to Institution B and obviously when the clients, the other party comes in to collect, they will see that instead of $100,000 there is about $70,000; that’s a pretty big difference. It could be the entire profit margin.

And because every institution is linked to another institution (so basically we have a system where all FATCA compliant institutions are forcing all of the FATCA noncompliant banks to become FATCA compliant); otherwise there’s not going to be any dealing between them.

So under the first part of FATCA, the Foreign Financial Institutions provide this information so they’re a third party verification. But verification of what?

And then there’s a third part of FATCA which really came into the tax landscape without as much fanfare as the first part. The first part, people have heard about: there have been protests, letters to congressmen, organizations, lobbying against it: what have you. But the third part of FATCA, and this is form 8938, it came in sort of in a very quiet way, in gradually but very early on already in 2011.

Indianapolis Form 8938 Lawyer | The Compliance Burden of Form 8938

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Form 8938, even though it does not share the same amount of penalties (and we will talk about penalties in a little bit later), still it’s importance is much more significant than that of FBAR.

The reason being is that not only are the US Persons required to report their Foreign Financial Accounts, which is very similar to FBAR, but they’re also required to disclose pretty much every type of a financial instrument.

In your handout you see here ‘Specified Foreign Financial Assets‘ under the column, under line I it should say: ‘Specified Foreign Financial Assets‘; this is a huge paragraph of assets. All of these assets must be disclosed on the form 8938.

So, we have Foreign Financial Accounts, we have Assets Held for Investment and not held in a financial institution, so we are talking about stocks and securities issued by a non US Person, any interest in a foreign entity, any interest in a foreign partnership, any financial instrument or contract including interest rate swaps, currency swaps, basis swaps, interest rate caps, bonds, notes, debentures, options, derivatives; I mean we’re talking about a whole range of financial assets that have to be now disclosed on form 8938 and they were never required to be disclosed in the same format at least before.

It’s a huge compliance burden obviously.

Form 8938 Penalties & Statute of Limitations | FATCA Tax Law Firm New York

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In order to force ‘Specified Persons‘ to report all of this; there’s a set of penalties. ‘Failure to File’: $10,000 per form. If the IRS sends out a notice and within 90 days the person still does not file the form the penalty accumulates at about $10,000 per month capped at $50,000.

Accuracy-related penalty: if underpayment of tax is related to a transaction involved any of these ‘Specified Foreign Financial Assets‘ the accuracy-related penalties go automatically to 40%.

The civil fraud penalty is actually similar to a regular civil fraud penalty, it’s 75%. Criminal Penalties are possible as well. Usually they’re combined with something – a very substantial income tax noncompliance. We have not really seen yet at least yet because remember this is a fairly new form; we have not really seen form 8938 criminal penalties being imposed. It’s probably coming down the road but not yet.

And then there are significant implications for the ‘Statute of Limitations’. With respect to the examinations, the Statute of Limitations basically the ability of the IRS to go back and open up a tax return until you file a form 8938, the Statute of Limitations never starts to run. Basically, the return is open forever. So the IRS can go back today and impose the penalties for the form 8938 that was not filed with the 2011 tax return.

And by opening up the tax return they can find other things and other penalties may accumulate; but there’s another aspect of it. The Statute of Limitations on the assessment of tax. So we are talking about this situation where it doesn’t matter; (and this is a trick for you) it doesn’t matter that the form 8938 was even required to be filed as long as the Specified Foreign Financial Assets are involved and the failure to report was of more than $5,000 of income from those Specified Foreign Financial Assets, the Statute of Limitations automatically goes up from 3 years to 6 years. Again, even if form 8938 filing threshold was not met.

These are very significant penalties. And now we can appreciate and understand then that when IRS adds a new category of filers to form 8938, this means a significant burden for those, to those filers and we can appreciate that we need to understand exactly who needs to file that form and when they need to file it and how this determination is being made.