21 August 2012
The Foreign Account Tax Compliance Act (FATCA) is a new withholding and reporting tax regime introduced by the US government to ensure that foreign financial accounts held by US taxpayers (which includes all US citizens) are correctly reported for US tax purposes. It requires foreign banks, investment managers and private equity funds to report on such accounts and the income arising from them. Some of these provisions take effect from 2013.
FATCA effectively enlists Foreign Financial Institutions (FFIs) and many foreign governments in the US government’s attempts to combat tax evasion by US taxpayers, whether resident in the US or not.
The cost of a failure to report income will increase as a result of the number of forms which will now require to be filed by US taxpayers, with annual penalties based purely on the failure to file the form rather than on whether income is correctly reported and US taxes paid.
The IRS has also implemented its third Offshore Voluntary Disclosure Program (OVDP – January 2012) to allow US taxpayers who are in default to bring their US tax affairs up to date. However, there is a significant penalty, equal to 27.5% of the highest aggregate value of unreported foreign financial assets during the period covered by the disclosure, in addition to the normal requirements to account for income taxes unpaid, interest and underpayment penalties.
Entry into the OVDP is only possible for taxpayers who have not yet not been contacted by the IRS. The amount of taxes, interest and penalties that may become due can be larger if it results from an IRS investigation outside the terms of OVDP.
US taxpayers who have not been filing US tax returns and/or disclosing relevant foreign financial assets should consider how the new reporting requirements for FFIs under FATCA might affect their position, and whether participation in the OVDP might be appropriate.
Please speak in the first instance to your normal contact at Moore Stephens, who will be able to call on specialist US advice where necessary.