Foreign Account Tax Compliance Act, dubbed FATCA, is the hot topic across the investment community. This Law should interest you too particularly if you are investing outside U.S. because it is about to change how you looked at foreign investments. Let us see what you should do to be compliant for FATCA and keep the IRS knocking your door.
FATCA is enacted to combat tax evasions by U.S. citizens through offshore financial accounts. If you are a U.S. tax payer, the law requires you to report your foreign financial assets. Foreign Financial assets include all investment assets held outside U.S. in Non-U.S. financial institutions (E.g. HSBC, Standard Chartered, etc.) including stock trading accounts, mutual funds, hedge funds, etc.
A Senate report had estimated that nearly $100 Billion taxable revenue is being evaded each year through offshore financial accounts. Why? Because the U.S. taxpayers simply don't bother to report these accounts. Although White House had been contemplating about tax evasions for quite a long time, the recent financial crisis elevated its importance. Increasing fiscal deficit made them look for additional revenues and they have tapped this route. By FATCA the Government is expecting to raise at least $7 Billion tax revenue by 2020.
What you have to do?
If you are a U.S. taxpayer and you have foreign financial assets as described above, you are required to report your foreign financial assets to IRS. Not everyone is required to report but if the worth of your foreign assets is above a threshold limit.
For a resident taxpayer the cutoff is $50,000 and for a nonresident taxpayer the cutoff is $100,000. If your asset is worth more than these values you are required to report your assets to IRS. Reporting is to be done along with your income tax return in a separate form 8938 - Statement of Foreign Financial Assets.
Please don't think that IRS won't know your foreign assets if you don't report. This is the major part of the law. This law also forces foreign banks like Credit Suisse, HSBC to report your foreign assets to IRS. You may wonder how U.S. can force a foreign bank to disclose client information but at the risk of avoiding details let's say they have a way to do it. Now what Uncle Sam will do? He will compare your reports along with reports provided by the foreign banks. If he finds out that you had not reported your foreign assets or reported at lower value, Bingo! He got a chance to fine you. Fine will start from $10,000 and can go up to $50,000.
Before reporting your account details the banks may ask for your permission (as per privacy laws). You can choose not to expose which will lead to branding your account as recalcitrant. In that case U.S. will withhold 30% of any U.S. based transaction to your account.
So either you report your account or you don't or you don't expose your account, Uncle Sam wins. Also U.S. is gaining increasing support from many nations as these nations also expect to implement a regulation of similar kind. In any case, it is better to report your foreign assets to U.S. and be compliant with the law.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.