What does FATCA really mean to US citizens
For those who have not yet heard, FATCA (or the Foreign Account Tax Compliance Act) is the mother of all “tax” laws. Before you read this article sit-down, or at least, take a few deep breaths.
FATCA is not new, and indeed has been around since 2010. It has however taken a few years to get a head of steam going, and is now in full swing with some critical deadlines about to occur.
In brief, FATCA requires any non-US bank (along with a multitude of other types of financial institutions) to advise the Internal Revenue Service (IRS) of the contact details of any US citizens who have an account with them (or face a heavy tax burden of their own).
Despite the world-wide outcry from banks, which the cost of implementation will extend to billions of dollars with absolutely no benefit for them, there has been almost universal compliance. Such is the formidable presence of Uncle Sam that governments around the world have had to introduce new legislation to circumvent existing privacy laws to enable FATCA to be effective.
Through the strong-arm tactics of FACTA, the IRS has managed to outsource most of the cost of tracking down its citizens who haven’t filed returns at a time when austerity and value for money are key.
Most of the people that I have talked to about FATCA have, by this point in the conversation, become pretty enraged about the intrusive nature of this legislation. By any measure, this is the ‘sledgehammer to crack a nut’ approach enabling the IRS to find its intended target - the ‘serious tax dodger’.
However, the news does not get any better. You may or may not know that US citizens and green card holders are required to file a US tax return for life; irrespective of where they live or work in the world. This is not new legislation, but appears to have escaped the knowledge of millions of US citizens who do not currently file a tax return.
Further there are a number of informational forms (such as the foreign bank account reporting form) which if not completed when they should be, can lead to an immediate penalty of $10,000 (the penalty can apply even if there would be no tax due on the interest derived in the accounts).
The question often asked (by those who have to date pleaded ignorance) is “will the IRS really find me?” The simple answer is yes they will (probably). That is what FATCA is about.
You may take the approach that since your account was set up prior to the advent of FATCA you have nothing to worry about because the bank doesn’t know that you are a US person. This unfortunately is a common misconception.
· From 1 July 2014, if you open a new account or apply for a new credit card (or interact with a bank in a new manner) the bank is under an obligation (under FATCA) to ask if you are a US citizen.
· Banks are required to review their existing client’s details for any US indicators (such as a US address or phone number) and, in such cases, again contact the client to ask the question about citizenship. At a high level, the extent of ‘effort’ required by a bank in relation to this review depends on whether the account is a ‘lower value’ or ‘higher value account’.
· Lower value is effectively an account with a balance of between $50,000 and $1Million. Higher value is an account in excess of $1Million.
Banks are in the process of providing the required details to Inland Revenue, and must do so by 30 June 2015. Inland Revenue then have until 30 September 2015 to provide that data to the IRS.
The unknown question is how long will it take the IRS to reach out to those who have not filed?
In reality, most US persons who live full-time in New Zealand and have no ongoing financial involvement with the US do not owe US taxes once their returns have been filed, but the issue is that to determine this they must first file a return, which is a compliance cost.
Alongside the “stick” of FATCA are a couple of carrots.
1) If you are a serious tax-dodger, you should contact a US lawyer and talk through your options regarding the Offshore voluntary disclosure programme. You may lose 50% of your wealth, but it’s better than jail!
2) If you have not filed a return in years, and your failure to file was not due to wilful neglect, then there is the option of putting your hands up using the Streamlined filing compliance procedures. Adoption of this approach will remove penalties and interest charges, which would normally apply to late filed returns (and often more importantly, they also apply to the penalties for failure to file the informational forms).
3) The compliance cost can (theoretically) be managed by using free-file software that the IRS has made available. At present however, the software does not cope very well with US persons who are outside of the US (our view is that at some point in the future this will change).
The message is however, whilst the carrot may be taken away, the stick is here to remain.
The author, Stuart Clouden is a director of CloudTax Limited, a boutique tax consultancy, specialising in providing US and NZ tax advice to individuals from within New Zealand (www.cloudtax.co.nz)