By Ken Berry
The Treasury Department has just released a new "model agreement" designed to facilitate global information sharing about investments under the Foreign Account Tax Compliance Act (FATCA)
of 2010. FATCA aims to deter tax evasion by US taxpayers who hold investments in foreign bank accounts.
Under FATCA, a taxpayer with foreign financial assets totaling more than $50,000 must report information about those assets to the IRS. The taxpayer is required to complete Form 8938
, Statement of Specified Foreign Financial Assets
, and attach it to his or her return. Failing to report foreign the financial assets on Form 8938 can result in an initial penalty of $10,000 plus penalties of up to $50,000 for continued failure after IRS notice. Furthermore, underpayments of tax attributable to non-disclosed foreign financial assets may be assessed an extra understatement penalty of 40 percent.
Note that taxpayers who own assets of more than $10,000 in foreign bank accounts at any time during the year still must file a FBAR (Report of Financial Bank and Financial Accounts). This reporting requirement is separate and apart from the FATCA requirements.
FATCA also requires foreign financial institutions (FFIs) to directly report to the IRS information about financial accounts held by US taxpayers or foreign entities in which US taxpayers hold a substantial ownership interest. To comply with these reporting requirements, an FFI must enter into a special agreement with the IRS by June 30, 2013. The new model agreement is intended to help meet that objective.
The model agreement was developed by the US Treasury after in-depth consultations with France, Germany, Italy, Spain, and the United Kingdom. Under the model agreement, a participating FFI will have to follow certain identification and due diligence procedures for account holders, report annually to the IRS about account holders who are US taxpayers or foreign entities with substantial US ownership interests, and withhold and pay over 30 percent of any payments of US source income.
Proposed regulations relating to the FATCA requirements were issued earlier in the year. It is expected that final regulations will be issued in the fall.