The Foreign Account Tax Compliance Act, passed in 2010, is a tool devised to help the U.S. locate funds of U.S. citizens being held in foreign banks. (See this earlier FATCA report on LBN). The law requires foreign banks to report data about accounts owned by U.S. citizens to the IRS. Failure to report involves large penalties. However, the Treasury Department is delaying the rollout of part of the act. Tax Attorney Rob Wood discusses FATCA in this report based on his Forbes article, “IRS Delays FATCA To Help Banks, But Offshore Account Disclosures Continue.”
Before FATCA, Wood says, there was very little monitoring of foreign bank accounts owned by U.S. taxpayers. Of course, taxpayers were always required to report foreign income. “If you have rental income, or dividends, interest, or payment for services,” those monies are taxable by the United States. Wood says that some people didn’t realize this or didn’t agree with it, “but that’s the rule.” Taxpayers were always supposed to report interest earned on foreign deposits.
In addition to that requirement, since 1970, there has been a Report of Foreign Bank and Financial Accounts (FBAR). Wood explains that these are not IRS forms, but rather money-laundering forms by a different branch of the Treasury Department. When the Swiss bank controversy was erupting in 2007 and 2008, “the FBAR forms became very important, even though most people were not filing them. The point, says Wood, is that the passage of FATCA finally provided an enforcement mechanism for rules that were already in place.
A different set of rules might apply to a U.S. citizen who set up foreign accounts and subsequently renounced U.S. citizenship. Wood points out that “every year is judged by itself.” Tax reporting is an annual event. People who renounce their American citizenship are no longer subject to tax on the foreign accounts. A different question, Wood says, is how the foreign banks might treat such people. Still, a properly done renunciation of citizenship cuts off the tax liability.
As to the reciprocal question—are U.S. banks required to make reports to foreign governments?—Wood says that the question is hard to answer. FATCA has spawned a host of intergovernmental agreements between the U.S. and many foreign countries wherein the other countries have agreed to help the U.S. collect taxes on foreign funds. Wood believes that these agreements are reciprocal. That is, “the U.S. will get information from . . . the United Kingdom . . . and there are provisions for the U.S. to give information to the U.K.” The question is whether other countries will seek this kind of information from the U.S. Many of them, Wood says, don’t care. Wood suggests that there will be “reciprocity in name only.”
For more information on the subject, please refer to Mr. Wood’s article in Forbes. Robert Wood is a tax attorney with Wood, LLP in San Francisco, California and spoke with The Tax Law Channel, an affiliate of The Legal Broadcast Network. The Legal Broadcast Network is a featured network of the Sequence Media Group.