One week ago we quoted IRS Commissioner John Koskinen who said the rollout of FATCA was likely to have "glitches". Notwithstanding a critical Treasury watchdog report questioning the readiness of the IRS, Commissioner Koskinen promised that his agency would be ready. One week later and we are beginning to question just how ready.
FATCA is short for the Foreign Account Tax Compliance Act. Conceived as an anti-tax evasion law and passed in 2010, the law requires US taxpayers to report certain foreign financial holdings. Beginning July 1st, the law also requires foreign banks and other financial institutions to begin reviewing their accounts and reporting those with ties to the United States.
The taxpayer side of FATCA began over a year ago. There were very few glitches but American taxpayers had already been required to report foreign accounts for decades. Beginning 2 years ago, taxpayers had to report certain foreign accounts on both an FBAR form (short for Report of Foreign Bank and Financial Accounts) and on IRS Form 8938, the so-called FATCA form. The data was mostly duplicative and probably explains why there were few problems.
The FBAR form is filed separately from one's tax return and must be filed electronically. The FATCA form 8938 can be filed with a taxpayer's income tax return.
The next phase of FATCA is the bank reporting phase. That begins on July 1st. Unfortunately, it appears the IRS truly is not ready.
Recently the IRS issued the FATCA form for banks, Form 8966. Unfortunately, the form has no instructions. With less than 90 days before the new law kicks in, banks are very nervous. Banks must spend millions to upgrade their computer systems to handle the new FATCA data requirements. With less than 3 months to go, the IRS still hasn't fully explained what information is needed and how it must be reported.
The W8-BEN-E form is quite complex and is 10 pages long. Banks are worried that by the time the IRS finally issues instructions there simply won't be enough time to reprogram their computers and design effective compliance procedures.
Several banking industry groups repeatedly asked the IRS to postpone FATCA. Their pleas fell on deaf ears. Now their worse fears are coming true. No instructions, no guidance and very little time to comply with the law.
Although the second phase of FATCA is directed towards banks, there has been an impact on taxpayers. Many foreign banks and brokerage firms have been refusing to open accounts for folks with ties to the United States. Some are even closing existing accounts. We believe much of that is due to the uncertainty about the rules and frustration with the IRS.
While most Americans don't have foreign accounts, there are millions of green card holders, foreign born Americans, US businesses with offshore branches, dual nationals and American expats living overseas that rely on offshore accounts. FATCA has become a huge inconvenience for these folks. In some extreme cases, banks have pulled credit lines from these folks due to the legal uncertainties.
If you have an unreported foreign account or questions about FATCA or FBARs, give one of our FBAR lawyers a call. We also assist offshore banks, insurance companies and brokerage firms with compliance questions.
or by telephone at (414) 223-0464. Initial consultations are without cost and always confidential.