FATCA – the Foreign Account Tax Compliance Act – effectively recruits foreign financial institutions as unpaid tax officers for the Internal Revenue Service (IRS).
The tough new tax rules are aimed at cracking down on tax cheats who have offshore investments earning an income that they have failed to declare on any tax return.
Foreign financial institutions have a stark choice – police FATCA and tell the IRS about dealings with customers or stop doing business in the US.
Lawmakers have tried to leave no stone unturned in their search for tax cheats.
Under FATCA, US taxpayers must declare any offshore income when they file their annual tax returns, while any foreign financial institution must also give the IRS a list of US customers holding accounts with more than $50,000.
That means the IRS is telling taxpayers to reveal their income from financial holdings outside the US, and most cannot afford to keep secrets because they do not know if their foreign banks are feeding their data to the tax collectors.
FATCA is just part of the IRS’s campaign to collect more taxes.
Teams of investigators will wade through the data to tie up taxpayers and their tax returns with income earned overseas. Discrepancies and suspicions will trigger tax investigations, foreign banks deducting 30% withholding tax on earnings and fines starting at $10,000 for failing to comply with the new laws.
Foreign financial institutions are spending millions to offer FATCA advice and solutions.
They must identify US customers or organisations where US customers have a controlling interest and then search to see if they hold more than $50,000 in one or more accounts.
If they do, from next year, they need to send details of the taxpayers and their holdings to the IRS.
For US taxpayers, FATCA also holds a dilemma – the likelihood is they will be caught if they are avoiding tax by failing to declare earnings on holdings in foreign accounts.
Worse still, if those accounts have been held for some time, the IRS will be asking questions about earnings in previous years and whether any tax and penalties for failing to declare that income are due.