Deadlines extended for certain foreign account reporting requirements under FATCA
The U.S. Department of the Treasury and the IRS have announced deadline extensions for some of the requirements in the final regulations implementing the Foreign Account Tax Compliance Act (FATCA). Under FATCA, foreign financial institutions (FFIs) — including foreign banks, brokers, insurance companies and investment funds — must disclose to the IRS certain information about their U.S.-owned accounts.
Although FATCA and its regulations are targeted at FFIs, they highlight the focus the federal government is putting on foreign accounts and, in turn, the need for individual taxpayers holding such accounts to comply with their own reporting obligations.
FFI reporting requirements
FATCA requires FFIs to report to the IRS certain information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. FFIs that fail to provide the required information face significant U.S. tax penalties. FATCA also generally requires FFIs to withhold 30% on certain U.S.-connected payments to “recalcitrant” account holders that fail to provide required information.
The final regulations issued this past January extended the phased-in transition period for the withholding, due diligence and reporting requirements. They also aligned the regulatory timelines with the timelines prescribed in the intergovernmental agreements (IGAs) with other countries or jurisdictions for the implementation of FATCA.
Under the regulations, withholding agents would generally be required to begin withholding on withholdable payments made after Dec. 31, 2013. The due diligence requirements for U.S. withholding agents and participating FFIs, which require them to document account holders and payees, would be phased in during 2014 and 2015. Annual reporting by participating FFIs would be phased in beginning on March 15, 2015 (for the 2013 and 2014 calendar years).
The new timelines
Under IRS Notice 2013-43, withholding agents now won’t generally be required to begin withholding on withholdable payments until those made after June 30, 2014. (Withholding isn’t required if the payments can be reliably associated with documentation on which the withholding agent can rely to treat the payments as exempt.)
The FFI agreement of a participating FFI that is properly registered with the IRS on or before June 30, 2014, will have an effective date of June 30, 2014, thereby postponing the deadline for completing due diligence on pre-existing accounts six months to Dec. 31, 2014. The later deadline also applies for withholding agents other than participating FFIs.
The obligation to monitor the account balance or value of pre-existing accounts to determine whether enhanced review is required has been deferred by one year. The account balance or value will be measured initially as of June 30, 2014. An account with a balance or value that was initially $1 million or below, and for which there has been no change in circumstances, won’t be subject to enhanced review unless the balance or value exceeds $1 million as of the end of 2015 or any subsequent calendar year.
The Treasury and the IRS will also be changing the rules to require reporting no later than March 31, 2015, for the 2014 year only (for U.S. accounts identified by Dec. 31, 2014). And the information exchanged by partner jurisdictions under IGAs in 2015 will be required to include only information related to the 2014 calendar year.
Are you at risk?
FATCA requires certain U.S. taxpayers holding foreign financial assets with an aggregate value that exceeds $50,000 to report certain information about those assets on Form 8938, along with their annual income tax returns. As FFIs increasingly report the information, the likelihood of being tripped up by neglecting to file Form 8938 will become greater, as will the likelihood of incurring a costly penalty. Taxpayers may also be required to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (more commonly known as FBAR).
If you hold offshore financial accounts, it’s critical that you properly report them to the IRS. The implementation of FATCA will bring a heightened level of scrutiny of your foreign assets. To ensure you’re in compliance, or if you have questions regarding the extended timelines for FATCA regulations, please give us a call.